Thomas Sowell‘s latest column compares much of today’s policymaking to the actions of children who chase a “big red bouncing ball” into the street, regardless of the likelihood of getting hit by oncoming traffic.
Raising the rate of homeownership was the big red bouncing ball that they pursued out into the street, in complete disregard of the dangers. A political myth has been created that no one warned of those dangers. But among the many who did warn were yours truly in 2005, Fortune and Barron’s in 2004, and Britain’s The Economist in 2003. Warnings specifically about the dangerous roles of Fannie Mae and Freddie Mac were made by Federal Reserve Chairman Alan Greenspan in 2005 and by Secretary of the Treasury John W. Snow in 2003.
Many, if not most, of the children who go running out into the street in pursuit of their bouncing ball may have been warned against this by their parents. But neither small children nor politicians always heed warnings. Politicians are of course more articulate than small children, so the pols are able to not only disregard warnings but ridicule them. That was what was done by Congressman Barney Frank and Senator Christopher Dodd, among many other politicians who made the pursuit of higher homeownership rates the holy grail.
In pursuit of those higher homeownership rates, especially among low-income people and minorities, the many vast powers of the federal government, from the Federal Reserve to bank-regulatory agencies and even the Department of Justice — which issued threats of anti-discrimination lawsuits — were used to force banks and other lenders to lower their standards for making mortgage loans.
Lower lending standards of course meant higher risks of default. But these risks — and the chain reactions throughout the whole financial system — were like the traffic ignored by a small child dashing out into the street in pursuit of his bouncing ball. The whole economy got hit when the housing boom became a housing bust, and we are still trying to recover, years later.
What makes all this painfully ironic is that the latest data show that the rate of homeownership today is lower than it has been in 18 years. There was a rise of a few percentage points during the housing boom, but that was completely erased during the bust.
