The Housing Blame Game, Redux

As the nation’s housing and financial crises continue to wind their way into the nation’s collective consciousness, the nation’s news dailies are taking their own swings at the blame game. And make no mistake about it: there is plenty to go around.

The New York Times is the latest to play a game of “pin the tail on the donkey,” with a look this past weekend at how the Bush administration made a historic push towards home ownership that has since backfired in a big way. It suggests that Bush officials did not want to stand in front the tracks of a fast-moving train of the nation’s real estate economy, with former chief economics adviser Lawrence Lindsey telling the Times that “no one wanted to stop that bubble,” because “it would have conflicted with the president’s own policies.”

The Times story, however, misses an opportunity to cast a more appropriate and wider net of blame here; Alan Greenspan isn’t mentioned in the story at all, and the man himself has admitted to Congress that he made mistakes in housing policy during his tenure at the Federal Reserve. And the Times also suggests that Fannie Mae (FNM) and Freddie Mac (FRE) were central to the genesis of the current crisis, a troubling example of revisionist history.

Bush Shares Blame

The above points shouldn’t detract from the role the Bush administration played in creating this mess. A June 27 editorial at HousingWire took a look at the role of recent government in pushing housing over the brink.

It wasn’t that long ago, after all, that nearly everyone was swept up in “the Ownership Society” — with the White House issuing press release after press release challenging lenders to loosen their credit standards and make riskier loans to minorities in the name of “expanding homeownership.” Consumer groups often even partnered with lenders to make riskier loans to the very minority groups they’re now indignantly suing lenders for lending to.

Legislatively, President Bush went so far as to propose eliminating down payment requirements altogether. In a September 2004 press statement, administration officials touted a so-called “Zero-Downpayment Initiative” that would eliminate the statutory requirement of a minimum three percent down payment for FHA-insured single-family mortgages for first-time home buyers.

But while it’s true the Bush administration is the latest to toss housing policy around, it’s equally true that this administration is also on the losing end of a long-standing game of musical chairs in this country; that is, it was unlucky enough to be left standing when the music finally stopped for housing.

Clinton Policies, Rethought

Before readers begin decrying the Times’ coverage, it’s worth noting a less-highlighted story from the same paper that ran last week, that looked at a Clinton policy that in all likelihood helped to fuel the current mess: a move in 1997 to remove the capital gains tax from a majority of real estate transactions.

[M]any economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls,” the story reads. “A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.

Such a change likely helped many Americans begin to see their homes as investments, not just places to live.

The Times isn’t alone in nodding to policies put into place by Democrats. Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, recently published an op-ed with the Wall Street Journal lambasting the tax policy shift as “fueling the mother of all housing bubbles.”

Of course, Nobel laureate or not, Smith has his own ideology to push — and, like many, he chooses focus most of it on the efforts of the Democratic Clinton regime’s role in pumping up housing, while ignoring similar efforts made by a Republican Bush administration. That he does so with such fervor underscores the highly political environment that has always enveloped housing policy in this country.

A Political Animal

Housing holds a very special place in the American psyche; and because of that, it’s remained front-and-center for any politician that has looked to gain office. The promise of “expanding American homeownership” has been part-and-parcel of nearly every Presidential platform since Jimmy Carter, and likely even well before that (although I personally have not found time to study housing policy in-depth further back than Carter’s administration, as of yet).

I suspect that housing’s central role to our culture has its roots back in the founding of our very country, when our system of property rights helped set the Yankees apart from the monarchies we’d left behind; property ownership has helped propel a middle class in America, depending on which historians you choose to read. Our model of private ownership of property has been foundational to our country — and therefore, it should come as little surprise to find that property rights are equally foundational to politics in our country.

What this means is that the political history of housing goes back far enough in this country to span both major political parties many times over. And that means that any one political party can amply choose to focus their blame on their rivals, while ignoring their own role in this mess; we’ve seen plenty of evidence of this in recent weeks, especially in the finger-pointing taking place over Fannie and Freddie.

It should be gospel, at this point, that the GSEs emphatically did not lead the charge into subprime and Alt-A mortgage credit; both Fannie and Freddie followed the private-party market, after watching their market share erode. But, as my colleague Darrell Delamaide writes in the current cover story for HousingWire Magazine, the two GSEs have been instrumental in pushing government policies designed to foster homeownership and affordable housing — a role that gives politicians on both sides of the aisle a stake in their activities.

More from Delamaide:

In the finger-pointing that followed the government takeover, Republicans were quick to charge that Democrats had resisted efforts to rein in Fannie and Freddie. The Wall Street Journal editorially labeled [House Financial Services Committee chairman Barney] Frank as “Fannie Mae’s Patron Saint” for his efforts to block any restrictions on the GSEs, a charge that the Massachusetts Democrat has forcefully rejected.

Frank and the Democrats noted that Republicans controlled both Congress and the White House for six of the past eight years. Former Ohio Congressman Michael Oxley had ample opportunity, as Frank’s predecessor at the head of the House committee, to steer through legislation to reform and regulate the GSEs. Oxley, for his part, says it was the Bush White House that thwarted his 2005 GSE reform bill with a ‘one-finger salute.’

All the above should illustrate how complex the GSEs were — and remain — politically, with a history that spans both parties, no matter how hard one side of the aisle attempts to paint the other with a given brush. But the fact that we’re now debating who pushed for what with Fannie and Freddie misses the larger point that neither GSE was responsible for pushing us into the financial mess we now face. It’s troubling, to say the very least, to see both political parties arguing about the role of the GSEs in the credit crisis, because such a discussion detracts from the more prominent reasons we ended up here.

In fact, had the GSEs been reformed, eliminated, or put into conservatorship back in 2005, it would have done little to stunt a push by independent investment banks on Wall Street into subprime and Alt-A mortgages. The GSEs had little to nothing to do with the emergence of the private-party RMBS market; and in fact, proof of that can be seen in the fact that the private-party market is now gone, and the agency MBS market continues ever onward. What sins did the GSEs commit, then? If anything, they used their funding advantages to begin purchasing Alt-A mortgages and securities well after the market had taken off without them, in an effort to regain lost market share; and they did so on a highly-leveraged basis, relying on their favored status.

Hardly the foundational sort of blame that some are now trying to pin on both firms. But when you’re half of the mortgage market, I suppose everything ends up being your fault.

It’s clear that housing remains highly politicized to this day, with enough blame to go around to everyone involved in both the public and private sectors; after all, we didn’t get into a historic mess overnight, or because of any one bad decision or company. It took a collection of actions, and a multitude of players, to create a mess of this magnitude; the sooner we all recognize this truth, perhaps the sooner we can begin to address real solutions that will make a difference and help prevent us from ending up here again.

With the federal government now poised to play its biggest role in mortgage banking since the Depression-era, such level-headed realism seems to be in precious little supply.

Disclosure: No positions in firms mentioned.

Comments

[prudentinve...:]

The crisis de jour is housing, but the more important and broader issue is whether we want an economy based on productive labor or one based on asset bubbles.

Since the early-90's, the Greenspan fed started to favor assets over labor by using artificially low interest rates to inflate asset bubbles. First to be inflated were stocks in traditional economic sectors. When those reached untenable P/E's, the creative folks on Wall Street came up with the notion of a "new economy" to justify absurd valuations for internet stocks to continue the bubble. When that became untenable, creative financing schemes were invented to create the real estate and derivatives bubbles.

Each of those bubble resulted in enormous wealth for those who created them or participated and exited at the right time. Since all members of the economy compete for goods and services, this has devalued the output of all productive labor, relative to the gains of these bubbles.

What we need is a national discussion on what sort of economy is healthy, sustainable, and fair. My own view is that an economy based on productive labor is healthy and sustainable, whereas one based on assets is not. As we increase the expenditures to the extremes that have now become necessary to try to maintain the asset bubbles, we risk irreversible damage to the economy.

2008 Dec 23 09:02 AM

[Lok Sang Ho:]

Artificially boosting home ownership was also the culprit behind the dreadful reversal of the housing market in Hong Kong in 1998. The administration blames it on the Asian Financial Crisis, but as I have demonstrated in several published papers it was largely a result of a policy to sell public housing at deeply discounted prices to sitting tenants, which diverted their home purchasing activity from the private market and thus severed the housing ladder, and the Tung Administration's policy to boost residential construction at 85000 units a year, which caused a glut.

2008 Dec 23 09:31 AM

[rm:]

[any one political party can amply choose to focus their blame on their rivals, while ignoring their own role in this mess]

Cheer up, Paul: the government is expanding its influence in other areas lately. There will be much more to debate and discuss going forward.

[we didn’t get into a historic mess overnight, or because of any one bad decision or company. It took a collection of actions, and a multitude of players, to create a mess of this magnitude;]

You've taken the fun right out of the debate. We've been conditioned to believe that there is ONE bad guy, one party who's chiefly to blame. We will not be satisfied until that culprit is found and lynched- literally or figuratively.

[the sooner we all recognize this truth, perhaps the sooner we can begin to address real solutions that will make a difference and help prevent us from ending up here again.]

Like most of our problems, we're all to blame, to some degree. But admitting that would force all of us to accept responsibility, and... we'd rather not. Thank you, though.

Also, regarding real solutions.. That's not terribly attractive to anyone involved in the debate. It removes a platform from which politicians can proselytize, pander, and raise money, it limits finger pointing, and it gives everyone one less thing to complain about...

then we'd have to revisit the same old issues we've been talking about and not doing anything about for years. New problems allow us to feel better about ourselves, because we're temporarily distracted from all the old problems we still haven't solved.

2008 Dec 23 10:30 AM

[Doug Poretz:]

Fascinating article, and comments by Prudentinvestor and Lok Sang Ho. However, I think this discussion misses another major point: in addition to the financial instruments and policies that certainly exerted major influence on the housing bubble, they existed within the context of a cultural phenomenon.

From 1986-1990, I was VP at NVR, working closely with co-founder and then Chairman/CEO Dwight Schar -- a brilliant businessperson who also happens to be a very close friend of George W. Bush, and for years one of the major fund raisers for the Republican party. In addition to working with him, I attended and made the company presentations to financial analysts (at the time NVR was the nation's largest homebuilder), so I got to see all the other builders make their presentations over a period of a boom and into the real estate crash of the early 1990s. It occured to me then that there was a fundamental change happening:

The fundamental rule of real estate had always been: location location location. In the mid-80s, that rule changed (at least for a while) to: product producty product. Location wasn't irrelevant, but take a look at the advertising and marketing of the new home builders. They stressed bigness, open space, tubs so big that the water got cold by the time the tub was filled, extensive upgrades, customizing etc. At the same time, the market began to be segmented so that there was no longer just a "move-up" market but there was a "first time move-up," a "second move-up," and then the McMansion market. Product became king. So what if the house was located in the far suburbs requiring an awful commute? Look what you could live in once you got home!

Whereas the real estate crash of the early and mid-1990s did pop that bubble, the culture that gave rise to that boom only went to sleep -- it was resurrected with incredible vigor in the late 90s and into the first few years of the 00's. The marketing that was use to turn-on the market could not have succeeded unless the market itself was susceptible to that pitch. And that is my point: the market itself (our culture) also must assume a major burden. The house became the most important evidence of wealth and evidence of wealth became a priority to Americans -- even if you didn't actually have wealth, you could still look like you had it. Remember the TV commercial that showed the guy with all the props of wealth who admitted that he was "in debt up to my eyeballs"? Yes. The appearance of wealth not only became more important than actual wealth, it became so important that debt would be assumed that actually undermined the reality of wealth for the sake of giving the appearance of wealth.

That, I believe, was a cultural phenomenon. Certainly it was helped by financial instruments and government policies. However, it was fueled by the culture and priorities that dominated our society and nation at the time. To take that out of the equation would be a major mistake because if we do not sensitive to it, we will not observe the changes in culture that will arise as fundamental values are reshifted to work in the current economic and political environment. And I think those cultural changes will exert at least as much influence as any new mortgage instruments that may be appear on the scene.

2008 Dec 23 10:53 AM

[xmplary:]

If by "pin the tail on the donkey" you meant president Bush, at least you'd be right about identifying the donkey. Housing is only one part of the equation. Why not take a look at why people can't afford the house they bought any more? We have been off shoring our jobs and making the fact cats in the middle that is cause of this mess. Workers on both sides get screwed, while the middle man gets rich. In other words, the trickle down economics where the the trickle is a slight drip. When people don't have jobs, how are they going to pay their mortgage? We can keep pointing our finger at all the wrong places, but hide the real one.

2008 Dec 23 11:26 AM

[BerkeleyBob:]

I think the article by and large has it right, the comments less so. The basic policy goal was to expand home ownership, not in itself a bad thing. The GSE's facilitated lending by creating a secondary market in mortgages, but were reasonably cautious in underwriting. The now failed investment banks cried foul at the "competition" but led a race to the bottom and were aided and abetted by the credit rating agencies in selling fraudulent packages of loans. The Wall Street Urinal's editors railed against the CRA, but that was not a major factor in the housing/credit meltdown. Both parties have plenty to answer for, and the capital gains tax reduction by Clinton may have set the stage, but it was Greenspan who endorsed the ARM as a boon to the consumer, but in reality a bail out for lenders stuck lending long at low interest rates when the political decision to finance the Great Society and the military adventure in Vietnam by deficits was made... Volker broke the back of secular inflation but at the unpopular cost of high unemployment. Both Greenspan and Bernanke were wearing the blinkers of an ideology and lost ability to see what was on the periphery...

2008 Dec 23 01:19 PM

[for parity:]

Good piece, Mr. Jackson. Here's a thougt for you and the readers.

What administration (president) wants to collapse the economic bubble which is occuring on their watch - whether they played much of a role in it's existence, or not?

Consider that both Clinton and Bush in the last year or so of their administrations were sitting on top of historic economic bubbles by some measure or another. One the dollar and dot.com tech bubble, followed by the real estate and credit bubble. Warnings were loud from many fronts - but to actually pull the plug ahead of time, which would have softened the hit both would inflict, is a bit much to ask of mere political mortals, is it not?

I might note, that there was one more event in the last months of the prior administration, which greatly fueled this housing bubble, and hence the Fannie/Freddie issue: HUD, Nov., 2000. New regulations, forcing $2.4 Trillion in mortgages targeting 28.1 low to moderate future home buyers. Talk about pushing the supply and demand relationship off the map. www.hud.gov/library/bo...

2008 Dec 23 07:14 PM