Vail Daily letter: Housing bubble
June 6, 2014
Jack Van Ens did a column devoted to Sen. Elizabeth Warren. You may recall her as the one who boasted about her Native American heritage, but then could not authenticate it.
Van Ens and Warren deny the view that government policies caused the housing bubble in the 2000s and the recession that followed. According to them, it was the bankers and their subprime loans which were then bundled for investors, who lost their shirts when many of the loans went bad.
I am not a fan of the bankers, who continued to grant high salaries and even bonuses to the big shots who took part in creating this disaster; and they were implicated in passing on shoddy goods to investors. But to limit responsibility to bankers ignores reality. Contrary to what Van Ens and Sen. Warren say, there were others who are just as culpable — starting with the borrowers, the loan brokers, and the politicians who enacted laws and practices that allowed a lot of loans to be made that shouldn't have been.
Responsibility is not limited to one political party — it started under the Carter Administration, and got worse under Clinton and Bush 43, as well as a lot of members of Congress, like Barney Frank and Chris Dodd. The idea was that it would be nice if more people owned their own homes. The problem was that this could not happen unless loan qualification standards were eased, to the point of recklessness.
A lot of people were granted home loans who did not have the usual down payment, and the usual income level and financial history that made it likely they would be able to pay. It was common for loan brokers to encourage false statements by the borrowers, just to get approval. Government regulators let banks know that they had to increase the percentage of loans to favored minorities, even if it meant accepting borrowers who would not otherwise qualify.
This caused a boom in housing construction and inflation of housing prices. So in addition to new homeowners, a lot of existing homeowners refinanced their properties. Sometimes the loan amount was 100 percent or even more of the inflated value of the home. Teaser loans with low initial interest rates were used. Borrowers didn't notice — or didn't care — that the interest rate could be increased after a certain period. Appraisers were encouraged to boost the stated value of housing property.
There was plenty of skullduggery going on. But it created jobs and profits in the real estate, construction and lending industries. How could this be a bad thing?
It came to a halt in the fall of 2008, when the US faced the biggest financial crisis since the Great Depression. There had been some who predicted this calamity, but it is amazing how many of the so-called experts got caught with their pants down. Remember how surprised they were?
Back to Van Ens and Sen. Warren. They are liberals, so they appear to think government can be a source of good works with no adverse consequences. They can't repeal the law of supply and demand. They can't prevent the corruption that occurs when government policies ignore basic reality. They shouldn't act surprised when the bubble bursts. And they should be honest about all those who should share the blame.
For further information, there are whole books about this subject — like Thomas Sowell's "The Housing Boom And Bust," available in print and audio versions. Those who like to view and listen can go to C-Span II's library and query the term "housing bubble." Same for Google. A good summary of the subject was carried by the Vail Daily on April 10, 2009: Sal Bommarito's essay "People borrowed too much." You can access it by searching the Daily's archives under Valley Voices for that date.