The Housing Boom and Bust
by Thomas Sowell
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Book Summary Information
Author: Thomas SowellEdition: Hardcover
Audio: English (Unknown); English (Original Language); English (Published)
Published: 2009-04-24
ISBN: 0465018807
Number of pages: 192
Publisher: Basic Books
Book Reviews of The Housing Boom and Bust
Book Review: A must read for all those who believe that the financial collapse proved the failure of capitalism
Summary: 5 Stars
Many claim that the financial crisis is shining proof that capitalism as an economic system is a complete failure. In candid camera, Bush said that Wall Street got drunk and that the markets failed to detect the risk of complex financial instruments. Obama expressed the need to pass financial regulations in order to prevent the financial crisis from happening again. Currently, the Obama Administration is seeking regulations over derivatives. Combined, the Bush administrations' and the Obama administrations' stimulus packages and bailouts are eight times larger than the New Deal.
Brush away what the power-hungry, poll-driven, devoid of moral principles politicians say and listen to Thomas Sowell. Sowell provides a lucid, well-reasoned account of the root cause of the financial crisis, which is none other than THE GOVERNMENT.
Sowell opens the book elucidating that there is no single cause that created the financial crisis, and he goes through the players involved-the Fed, Freddie and Fannie, HUD, Wall Street Firms, Rating Agencies, bank lenders, borrowers etc. Although there were many players that are partly responsible for the housing boom and bust, Sowell repeatedly states throughout the book that the government was the major over-riding force that created this mess.
Sowell explains it was the government policies of land restrictions that created exorbitantly high home prices in particular localities, and the origins of the housing boom and bust stems from these particular localities. Areas with numerous land restrictions, such as California, Las Vegas, and Arizona, significantly raised the national average percentage in home prices from 2004 and 2005. Instead of recognizing the reality that government itself was creating unaffordable housing through land restrictions, the government decided to ignore it and intervene in the financial industry to create affordable housing.
Sowell elucidates that the loosening of mortgage loan requirements by banks was due to the government, which intervened in the financial industry to expand affordable housing. The lowering of standards for mortgages loans was the root cause of the housing boom and bust that resulted in massive foreclosures. The Community Reinvestment Act (CRA), Freddie and Fannie, Housing and Urban Development (HUD) and politicians that hampered the reform of Freddie and Fannie are the players at the root of this mess. Sowell argues that blaming the lack of regulatory oversight on the Wall Street Firms that packaged the Mortgages into securities and sold them to investors ignores the origins of the crisis. The securities would have been secure if homeowners did not default on payment, but the government pushed for risky lending practices.
The Community Reinvestment Act allowed government officials to pressure lenders to loan to low and moderate income (generally minority) applicants despite the inherent risk. Regulators imposed quotas in which banks had to make a set number of loans to low and moderate income applicants. This led banks to throw out the traditional criteria for mortgages and loans, and because of this there was rapid growth in risky, subprime loans. Freddie and Fannie lowered their standards on the mortgages they purchased from banks, and HUD put a target on the number of subprime loans bought by Freddie and Fannie. As Freddie and Fannie acquired trillions of dollars in risky subprime loans and faced accounting scandals, politicians, such as Senator Dodd and Barney Frank, attempted to block reform and dismissed fears of the risk being undertaken by Freddie and Fannie.
Sowell expounds on the idiocy of using more government intervention to solve problems created by government intervention in the first place. Political solutions are generally fixes to problems caused by government policy. I like to use the analogy of a kid dealing with a pimple. If the kid leaves it alone then eventually it will go away. However, if the kid pops it, then it will become itchy. Then if the kid scratches it and puts different creams on it, the pimple becomes redder and even more itchy and visible. The best remedy was to leave it alone, but by intervening the kid is left with a glaring red, bumpy blotch.
Sowell explains that it was government policies concerning land restrictions that created the bubble, then, in turn, the government intervened to expand affordable housing. Now that the bubble has burst, politicians are racking up major deficit spending to try the fix the problem they caused. The government is like the kid that keeps picking at its pimple. The markets were sending signals that lenders should back away from handing out risky mortgages and move towards the traditional mortgages. But government doesn't work like a business where costs have to be accounted for; politicians disregard the consequences of bad policy.
Sowell exposes the problems when the government uses false visions to shape policy without any regard to detrimental consequences. The need for more affordable housing was based on the false vision that positive social outcomes could result from expanding home ownership (apparently, section 8 housing and public vouchers did not dissipate their false vision). Accordingly, affordable housing was based on the false vision of racial discrimination as the explanation of the different rates of mortgage approval rates amongst blacks and whites.
Sowell ends by examining the New Deal, which many believed got us out of the Depression. In fact, through FDR's 7 years of presidency, we had double digit unemployment, and it was only when the New Deal was over that the economy recovered. Following FDR's footsteps, the money from the stimulus package will not be spent right away, and there will be high inflation resulting from deficit spending. Sowell explains through massive deficit spending the government is using our tax money to create power over the economy not legalized in the constitution.
Sowell's book is an excellent, clear account of the cause of the housing boom and bust. I'm frustrated in the politicians and media that continue to deflect blame on the failure of the markets as the cause of this crisis. Even more disappointing is Alan Greenspan who warned of the risks being undertaken by Freddie and Fannie, but then whined in his testimony that he mistakenly put too much faith in the free markets. What a traitor to free market capitalism! Sowell shows that it's natural for government to continue to patch on solutions to problems that they've created themselves. However, if the government continues encroaching through regulation and spending in the market, we can wave goodbye to a country whose prosperity was sustained through a system that has worked for centuries.
Summary of The Housing Boom and Bust
This is a plain-English explanation of how we got into the current economic disaster that developed out of the economics and politics of the housing boom and bust. The “creative? financing of home mortgages and the even more “creative? marketing of financial securities based on American mortgages to countries around the world, are part of the story of how a financial house of cards was built up—and then suddenly collapsed.
The politics behind all this is another story full of strange twists. No punches are pulled when discussing politicians of either party, the financial dangers they created, or the distractions they created later to escape their own responsibility for what happened when the financial house of cards in the financial markets collapsed.
What to do, now that we are in the midst of an economic disaster, is yet another story—one whose ending we do not yet know, but one whose outlines and implications are explored to reveal some surprising and sobering lessons.
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