Conservative writer, economist, and icon Thomas Sowell has just published a new book on the housing crisis. It is simply called The Housing Boom and Bust.
I'll be writing a full review this weekend, but let's just hit the high points of his argument.
- The housing boom was not nation-wide. It was centered in a few places where land-use restrictions make it very difficult to build houses for people.
- The problem was not a lack of regulation. There was plenty of regulation. Most of it was bullying banks into lowering their credit standards to offer loans to people that were bad credit risks. Some politicians attacked regulators that reported on the developing problems at Fannie and Freddie.
- There was no significant discrimination against minority borrowers. There were corrupt politicians that took contributions from banks, insisted on lower credit standards, and then blamed the banks for greed. Think Barney Frank and Chris Dodd, for starters. There were liberal activists shaking down banks for cash by accusing them of racism.
- Political actors never have to deal with costs. Political activists with a "vision" never have to deal with reality. They can blame and shame and posture and order people around. But when things go south, they refuse to face reality.
- Business has to face reality. Unregulated banks can't just loan money to anyone. They have to think about the costs of risky action. But when the government insists they act recklessly, on pain of political sanction, what can they do?
- The derivatives mess grew out of the government's reckless policy. Given that the banks were forced to load up on risky debt it made sense to lay the risks off. But nobody had any experience with the new financial instruments, not the rating agencies, not the banks, not the analysts. So people made mistakes in pricing risks. But then the finance players wouldn't have invented the new instruments unless there was a need to spread the risk around.
It all points up the importance of limited government. It's all very well for the government to plunge off with its mega programs. But what happens if things go wrong? Since government is very bad at recognizing and dealing with the costs of its initiatives, there is always a chance that government will make a complete mess of things. Then it will try to patch up the mess with another mega program that makes things worse.
So we get back to the "too big to fail" conundrum. If it is too big to fail, then it is too big! That applies to banks and automakers, and it also applies to government.
Maybe, after a century of anti-trust bumbling and fumbling we have an anti-trust principle. If it's too big to fail, then it's too big! Whaddya think, Senator?
But does this make any difference? Will liberals ever learn? Never mind blaming them for the crisis. Can we at least get them to see how their interventions hurt the poor that they are trying to help?
Probably not. That's why we have politics. You don't need the liberals to realize their error. You just need to persuade enough moderates and independents so you can repeal stupid liberal programs that lead to a stupid liberal housing crash.
But nobody said it was going to be easy.