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WILLIAMS: Housing boom and bust
Hot off the press is my colleague Thomas Sowell's 43rd book, "The Housing Boom and Bust." The book is an eye-opener for anyone interested in the truth about the collapse of the housing market, which played a major role in our financial-market crisis.
The root of the problem lies in Washington. The Community Reinvestment Act of 1977, later given teeth during the Clinton and George W. Bush administrations, forced financial institutions to make risky mortgage loans they otherwise would not have made.
President Clinton's Attorney General Janet Reno threatened legal action against lenders whose racial statistics raised her suspicions. Bank loan qualification standards, in general, came under criticism as being too stringent on down payments, credit histories and income. Fannie Mae and Freddie Mac, two government-sponsored enterprises, by lowering their standards for the kinds of mortgage paper they would purchase from banks and other mortgage lenders, gave financial institutions further incentive to make risky loans.
In 2002, the Bush administration urged Congress to enact the American Dream Down Payment Assistance Act, which subsidized down payments of homebuyers whose income was below a certain level. Mr. Bush also urged Congress to pass legislation requiring the Federal Housing Administration to make zero-down-payment loans at low interest rates to low-income Americans. Between 2005 and 2007, Fannie Mae and Freddie Mac acquired an estimated $1 trillion worth of subprime loans and guaranteed more than $2 trillion worth of mortgages. That, Mr. Sowell points out, is larger than the gross domestic product of all but four nations.
Numerous warnings went unheeded. In congressional hearings, Treasury Secretary John W. Snow said, regarding the risks assumed by Fannie Mae and Freddie Mac, "The concern is, if something unravels, it could cause systemic risk to the whole financial system." Peter J. Wallison, American Enterprise Institute scholar, warned that if Congress did not rein in Fannie Mae and Freddie Mac, "there will be a massive default with huge losses to the taxpayers and systemic effects on the economy."
There were many other warnings of pending collapse, but Congress and the White House, in their push for politically popular "affordable housing," ignored them. Rep. Barney Frank, Massachusetts Democrat and now chairman of the House Committee on Financial Services, said critics "exaggerate a threat of safety" and "conjure up the possibility of serious financial losses to the Treasury, which I do not see." Sen. Christopher J. Dodd, Connecticut Democrat and chairman of the Senate Banking Committee, called Fannie Mae and Freddie Mac "one of the great success stories of all time" and urged "caution" in restricting their activities, out of fear of "doing great damage to what has been one of the great engines of economic success in the last 30 or 40 years."
Mr. Sowell provides numerous examples of both federal and state government actions that created the housing boom and bust and the devastating impact on domestic and foreign financial markets. But here's what I don't get: What can be said about the intelligence of the news media and the American people who buy into congressionally created lies that our problems were caused by Wall Street greed and Bush administration deregulation? Mr. Frank says, "We are in a worldwide crisis now because of excessive deregulation" and "mortgages made and sold in the unregulated sector led to the crisis."
Our financial sector is our economy's most heavily regulated sector. In the banking and finance industries, regulatory spending between 1980 and 2007 almost tripled, rising from $725 million to $2.07 billion. I challenge anyone to come up with one thing banks can do that's not covered by a regulation.
For Washington politicians to get away with spinning the financial crisis the way they have suggests that the American people are either stupid or ignorant. I hope it's ignorance because "The Housing Boom and Bust" is the cure.
Walter E. Williams is a professor of economics at George Mason University.
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