BOOKS: ‘The Housing Boom and Bust’

THE HOUSING BOOM AND BUST
By Thomas Sowell
Basic Books, $24.95, 184 pages
REVIEWED BY JOHN R. COYNE JR.

For some time now, we’ve been treated to an ongoing TV festival of congressional hearings featuring executives from the private sector being hectored and questioned rudely by various legislators, the most querulous among them apparently intent on finding scapegoats for the disastrous results of policies and programs they themselves initiated and enacted for purely political reasons.

At times, its seems like a search for the little man who wasn’t there. However, as Thomas Sowell points out, the whole economic mess in which we are mired grew in large part directly out of the politics and policies of the housing boom, manufactured in Washington.

At some point in the political process, it became apparent that increasing homeownership among low-income people — people with bad credit and without money for the conventional 20 percent down payment — could translate into votes by creating a whole new constituency. This was what politicians began to call “the underserved population,” and they set out to pander to them.

This they did, first by establishing the pursuit of homeownership home as “a good thing,” then by bringing pressure to bear on lending institutions to loosen loan requirements and revise them downward. In effect, lending quotas were established, and banks were encouraged to meet those quotas by lowering standards for mortgage loans.

If banks were reluctant to do so in order to serve “the underserved population,” the governmental agencies that regulate them and answer to Congress could make it difficult for the uncooperative banks to compete against more cooperative institutions.

The drive to put “underserved” potential voters in homes, whether they could afford them or not, began with the Community Reinvestment Act of 1977 and picked up a full head of steam during the Clinton years. However, as Mr. Sowell points out, the George W. Bush administration made no attempt to put on the brakes. In fact it stepped on the gas, sending Congress the embarrassingly titled American Dream Downpayment Initiative, which proposed subsidizing down payments and was signed into law in 2003.

“After the passage of that Act,” Mr. Sowell writes, “the president also urged Congress to pass legislation permitting the Federal Housing Administration to begin making zero-down-payment loans at low interest rates to low income Americans.”

This, in essence, is what brought on the crisis. Government imposed riskier mortgage lending practices on banks, which depended for money on homeowners’ monthly payments. Increasing numbers of these new “underserved” homeowners were unable to meet their payments, and the banks, plus the institutions to which they sold mortgages and the Wall Street firms that bundled those mortgages into securities, all suddenly found the money was running out.

The response of legislators to this crisis, brought on by governmental intervention, was to absolve themselves and propose more intervention, quickly switching to the new theme that “the unregulated market was the source of the financial crisis.” Especially adroit at avoiding blame for any responsibility were two pre-collapse defenders of Fannie Mae and Freddie Mac and advocates of subprime lending.

“In the wake of the housing bust,” Mr. Sowell writes, “Congressman Barney Frank and Senator Christopher Dodd, as chairmen of the House and Senate committees most involved in the housing market — and long-time promoters of the very policies that led to the housing boom and bust — were all over the media, where they were treated as experts, able to explain the problems and provide solutions.”

Inevitably, Mr. Sowell points out, each of these solutions provides “a classic example of politicians ’solving’ one problem without regard to how many new problems that solution created.”

It’s highly unlikely, Mr. Sowell concludes, that politicians, “who for years made ’home ownership’ the touchstone of housing policy will acknowledge any responsibility for the financial disasters and widespread unemployment today.”

It’s a shame that those politicians can’t be assembled at witness tables in hearing rooms and required, under oath, with cameras rolling, to answer the questions raised by Mr. Sowell in this lucid and dispassionate analysis. Short of that, perhaps voters, with this book as guide, will decide to put those questions directly to their elected representatives and demand some answers.

Mr. Sowell, scholar in residence at the Hoover Institution; author of more than 30 books, among them “Basic Economics,” which has been translated into six languages; and a nationally syndicated columnist, is one of those rare economists who can explain complex economic problems to laymen in crisp, clear and vigorous prose. For anyone looking for a straightforward and honest discussion of the origins of our current crisis, informed by a deep understanding of both economics and politics, “The Housing Boom and Bust” is required reading.

• John R. Coyne Jr., a former White House speechwriter, is co-author with Linda Bridges of “Strictly Right: William F. Buckley and the American Conservative Movement,” published by Wiley.