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Tradeoffs in affordable housing
I was flipping channels earlier and stumbled upon a Fox News special on the financial crisis. The slant of the piece was ridiculous: the roots of the crisis go back to FDR, LBJ and Carter; Democrats like Barney Franks and Chris Dodd were in bed with Fannie and Freddie, which caused the whole mess; Barack Obama made it worse in his community organizing work in the 80s; Republicans have gotten it right all along; and if only the market were left alone (unlike FDR's horrible meddling), all would be well again. It's Fox News, so what do you expect.
The piece did make one point that was worth considering, however. That is essentially that efforts to increase affordable housing actually had the opposite effect in the long run. As the piece describes it, Congress pushed Fannie, Freddie and private sector banks to sell subprime mortgages; this made demand for housing shoot up, so prices rose too, bringing in investment money from all over the world, which in turn made it possible to build and lend even more. Ultimately the bubble had to burst, because too many people owning the real estate collateral at the bottom of the pyramid couldn't afford it (or decided it wasn't worth paying the mortgage anymore on a home of dropping value); and then everything came tumbling down.
There are several problems with their narrative. Fannie and Freddie did not single-handedly cause a housing bubble. Democrats in Congress did not force investors to leverage MBS's 30 times over. Nor did they force mortgage lenders to use sneaky teaser rates and fine-print gimmicks to snooker people into bad loans. Nor was Barack Obama's work for affordable housing in the 1980's responsible by any plausible stretch of the imagination for the crisis in 2008.
The goal of having everyone in America own their own home, however, certainly needs to be revisited. The drive toward that goal was a factor in the real estate price bubble. It's probably a combination of the Democrats' zeal for affordable housing, plus the Republicans' zeal for an Ownership Society, that fed the housing bubble. But it was not the bubble itself that caused a global financial crisis; it was the over-leveraging and deceptive securitization practices (in which real risk was obscured or ignored) that brought Wall St down. The real estate bubble might have been inevitable, but those were not. The first rule of every financial advisor is always "Diversify!" - so how could the whole financial system have become so dependent on a tiny sliver (subprime mortgages) of the economy?
That's were regulation comes in. The government needs to have a role in ensuring diversification in the markets and limiting risk. The growth of a global economy built on the house of cards of subprime mortgages in the U.S. shouldn't have just set off red flags in the quarters of risk-averse investors; it should have been illegal. Deregulated free markets allow for tremendous short-term returns, but they also have no built-in protections against collapse. That's where the Republicans have been wrong and the Democrats have been right for the last decade. But it would behoove everyone involved in the system to reconsider their assumptions.
The piece did make one point that was worth considering, however. That is essentially that efforts to increase affordable housing actually had the opposite effect in the long run. As the piece describes it, Congress pushed Fannie, Freddie and private sector banks to sell subprime mortgages; this made demand for housing shoot up, so prices rose too, bringing in investment money from all over the world, which in turn made it possible to build and lend even more. Ultimately the bubble had to burst, because too many people owning the real estate collateral at the bottom of the pyramid couldn't afford it (or decided it wasn't worth paying the mortgage anymore on a home of dropping value); and then everything came tumbling down.
There are several problems with their narrative. Fannie and Freddie did not single-handedly cause a housing bubble. Democrats in Congress did not force investors to leverage MBS's 30 times over. Nor did they force mortgage lenders to use sneaky teaser rates and fine-print gimmicks to snooker people into bad loans. Nor was Barack Obama's work for affordable housing in the 1980's responsible by any plausible stretch of the imagination for the crisis in 2008.
The goal of having everyone in America own their own home, however, certainly needs to be revisited. The drive toward that goal was a factor in the real estate price bubble. It's probably a combination of the Democrats' zeal for affordable housing, plus the Republicans' zeal for an Ownership Society, that fed the housing bubble. But it was not the bubble itself that caused a global financial crisis; it was the over-leveraging and deceptive securitization practices (in which real risk was obscured or ignored) that brought Wall St down. The real estate bubble might have been inevitable, but those were not. The first rule of every financial advisor is always "Diversify!" - so how could the whole financial system have become so dependent on a tiny sliver (subprime mortgages) of the economy?
That's were regulation comes in. The government needs to have a role in ensuring diversification in the markets and limiting risk. The growth of a global economy built on the house of cards of subprime mortgages in the U.S. shouldn't have just set off red flags in the quarters of risk-averse investors; it should have been illegal. Deregulated free markets allow for tremendous short-term returns, but they also have no built-in protections against collapse. That's where the Republicans have been wrong and the Democrats have been right for the last decade. But it would behoove everyone involved in the system to reconsider their assumptions.