Thomas Sowell, the iconoclastic Hoover Institution economist, has a new book out tearing apart the why’s, how’s, and who’s to blame in the housing crisis. The book, The Housing Boom and Bust, dissects the making of a political crisis. In his column at Townhall.com, Sowell writes:
Beginning in the 1990s, getting a higher proportion of the American population to become homeowners became the political holy grail of government housing policies. Increasing home ownership among minorities and other people of low or moderate incomes was also part of this political crusade.
Because banks are regulated by various agencies of the federal government, it was easy to pressure them to lend to people that they would not otherwise lend to– namely, people with lower incomes, poorer credit ratings and little or no money for a conventional down payment of 20 percent of the price of a house.
Such people were referred to politically as “the underserved population”– as if politicians know who should and who shouldn’t get mortgages better than people who have spent their careers making mortgage-lending decisions.
But, in politics, power trumps knowledge. Banks whose mortgage loan approval rates for “the underserved population” did not match the prevailing preconceptions found that they could not get government regulatory agencies to approve their business decisions on opening new branches or enlarging their financial operations, the way competing banks did when those competing banks met the lending quotas set by the government.
Sowell doesn’t spare members of either party. It was an equal opportunity catastrophe, encouraging banks that are by nature conservative to take risks they were ill equipped to assess or evaluate effectively.