Is the Housing Crisis Really and Truly Over?

Sign on house that reads Bank Owned

The housing depression/slump is over, right?

Obama solved it.

Before Obama, we had an unfettered free market for housing. This led banks and lenders to become crazy and greedy, which is man’s natural state absent government intervention.

Thanks to Obama, we now have “regulation” of the marketplace. And all is well. Or at least a whole lot better — thanks only to the policy of regulation and control, of course.

Bush failed to regulate, and it led to calamity. Obama came in to regulate, and at last things are sane again.

End of story. Or is it?

Not everyone agrees with this conventional, uncritical wisdom. For example, the following was reported at and Yahoo Finance on 2/22/15:

Home prices have rebounded since bottoming in 2012, but it hasn’t exactly been a soaring recovery. The S&P/Case-Shiller index of home prices in 20 cities rose only 4.3 percent in the 12 months through November.

It’s almost nine years since home prices peaked, notes Nobel laureate economist Robert Shiller, co-creator of the index.

“This is the most dramatic slump in housing we’ve ever had,” he told Yahoo Finance.

“The government has taken over risk management through Fannie Mae, Freddie Mac and the FHA [Federal Housing Administration].” Those agencies back the overwhelming majority of new mortgages.

“It’s not even much of a private market,” Shiller explained.

Actually, it’s not a private market at all. And it wasn’t a private market before the housing bust began nine years ago.

A private market would consist of banks and lenders who would face the consequences of their actions. Before the housing bust of 2007, the government guaranteed that most lenders would not take the loss if loans went bad. Since the housing bust, the government assumes even more responsibility than before. Not to mention the massive billion dollar bailouts of 2008 and 2009.

In a free market, government neither guarantees nor bails out companies who make bad decisions. It leaves them alone to fail and learn. In a free market, customers punish businesses who do not provide for their needs, and reward business who do. Government does not try to collectively impose its will for the “general good.” Consumers are left to decide this for themselves.

You might not agree with the idea of a free market. But you still can’t call it a free market if we don’t have one. And you can’t go around blaming “the free market” for what happened in 2007 and 2008 when we did not, in fact, have a free market.

Think of your local grocery store chains. Imagine if these grocery stores faced no risk for making bad decisions, such as buying too much food, or the wrong kind of food (based on what customers want), and as a result losing profits from all the food that spoils. Now imagine if we had a guaranteed government program to promise to pay these stores for any losses if they make bad decisions. Do you think grocery stores would be more or less efficient and self-responsible than they are now? Do you think it would have no impact whatsoever on the for-profit marketplace if gigantic grocery chains — some of them, or even all of them — would be able to count on taxpayer money if they make serious mistakes?

He reiterated his view that owning a home isn’t for everyone. “There is an argument for helping low-income people get a house. I think it makes them feel better about their attachment to this country and themselves,” Shiller said.

Actually, there is no argument either for or against “helping low-income people get a house.” This is not the concern of a government. This might be the perfectly legitimate concern of a charity, e.g., someone with a ton of money he or she plans to give away, trying to decide whether buying houses for people would be a good way to spend it.

But that’s not what government is supposed to be doing. And the more government gets involved in the charity or rescuing business, the more bankrupt the government becomes. Far worse, the more government takes away responsibility from businesses to take the hits for their own wrong decisions, the less accountable and responsible and rational you can expect those businesses to be.

Granted, the housing bubble of 2007-08 was complex. It was partly the result of businesses making bad decisions for which they were later bailed out, and for which they knew they’d be bailed out because of prior guarantees created by the government going back to at least the 1930s. The bubble was also partly the result of government intervention in the marketplace, providing incentives for banks to make subprime loans (and other bad risks, from a financial point-of-view), so that politicians could claim that they were enabling more citizens to own houses.

We see how well it worked out.

(For the two best references on the causes of the housing bust, read economist Thomas Sowell’s “The Housing Boom and Bust” and former BB&T Corp. CEO John Allison’s “The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy’s Only Hope”).

The worst thing about the housing slump/depression is not that people falsely believe it’s completely over when it actually isn’t. (Most people probably can sense it isn’t.) The worst thing about the housing depression is that people think it was caused by a free market, when it was actually caused, enabled and created by government intervention in the marketplace. As a result, we have more government intervention in the marketplace than ever before; and we’ve been led to think that we’re safer for it, when if anything we’re less safe than ever before.

The irony here is that the strongest supporters of government regulation of the marketplace dislike or despise “big business” and “profit-mongering corporations.” Obama bashes them every day of the week, and he won election twice; so it’s reasonable to assume that most people agree, to some extent.

Yet if you hate big business so much, then why do you not want them to face the responsibility of taking the heat for their wrong or bad decisions? Why do you want them to benefit from guaranteed corporate welfare, whenever anything goes wrong?

The solution is to get rid of this nonaccountability and get rid of the possibility that banks and lenders can have guaranteed government help whenever things go wrong. However, the other part of the solution is for government to get the hell out of the way. Government should not be involved in the housing or lending business in the first place. Government should uphold private, voluntary contracts and prosecute fraud, of course. But government should not be setting the terms for every small detail of what goes on in the complex transaction of buying a house.

Government, outside its proper role, is always the problem and never the solution. Until or unless people get this through their heads, and demand leaders who understand and agree, we’ll never stop the cycle of crisis. And we’ll never be safe.


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