Opinion : \'The Housing Boom & Bust\' book review

Preface to a book Report on The Housing Boom and Bust by Dr. Thomas Sowell

Bio of Thomas Sowell author of The Housing Boom and Bust

Thomas Sowell (born June 30, 1930) is an American economist, social theorist, political philosopher, and author. A National Humanities Medal winner, he advocates laissez-faire economics and writes from a libertarian perspective. He is currently a Rose and Milton Friedman Senior Fellow on Public Policy at the Hoover Institution at Stanford University. He is the author of more than 30 books. We have found his descriptions of economic theory easy to understand as they are devoid of charts, graphs, and formulas. In this book Chap. 1 discusses: The Economics of the Housing Boom. Chap. 2: The Politics of the Housing Boom. Chap.3: The Housing Bust. Chap 4: Housing Mystiques and Housing Mistakes. And Chap 5: The Past and the Future. The following report may be paraphrase or directly quoted from the book. Opinion may be injected, but should be easily determined as such by the reader.

A report on the first chapter of Thomas Sowell’s book – The Housing Boom and Bust. Chapter one – The Economics of the Housing Boom. Housing prices pushed higher and higher because of artificial demand and easy financing?

The skyrocketing prices of single family homes really exploded beginning the new century. Mr. Sowell reports that from 2000-2005 home prices rose by one third from $143,000 to $219,000. In Los Angeles for example prices rose 110%, in San Diego 127%, in New York 79%. During the boom warnings were disregarded and rhetoric from all sides praised the benefits of increased home ownership. The players: The Federal Reserve System(The Fed), The Federal National Mortgage Association (Fannie Mae), The Federal Home Loan Mortgage Corporation (Freddie Mac). The latter two are Government created but privately owned, profit-making enterprises that buy mortgages from banks. The seller (bank) gets immediate capital without having to wait the full term of the mortgage. The banks then have money to lend to other parties. Risk is terminated and profits enhanced. Freddie and Fannie are government-sponsored enterprises (GSE’s). Lenders wishing to sell their paper to these GSE’s must conform to their rules and regulations, however, one of the consequences of reselling mortgages on a large scale is that the original lender has fewer incentives to be meticulous about the financial qualifications of the borrower. A third player is The U.S. Department of Housing and Urban Development (HUD). HUD exercises authority over Fannie and Freddie and indirectly over banks and home buyers – and directly influences mortgage lending practices. A fourth player(s) Wall Street firms which buy mortgages bundle them and issue stocks and bonds based on the value of these mortgages. Therein begins one of the major problems, by this bundling it is difficult if not impossible to judge the credit worthiness of the mortgage(s) itself. Low grade or sub-prime was mixed with high grade paper. It would be very difficult to do due diligence on this mix. The other rub is although not locked in there was a presumption that in event of crises the Federal Government would not let Freddie and/or Fannie fail. Investors bought securities issued by these two (GSE’) believing there was a guarantee, no where explicit but widely assumed, that government would step in preventing default. (The fish is a day old.)

Another factor is interest rates. Interest rates on conventional 30 year mortgages was about 8% in 1973, 18% in 1981, and 6% in 2005. Interest rates have a great influence on demand for homes. Thus: a difference of two points from 7 to 5 % can mean a yearly difference of $5,000 on a $400,000 home mortgage. It is safe to say that low interest rates led to inflation in the housing market. Real estate value is location, location, location. Prices are local in origin and depend largely on local land use laws. Moreover, confusion between the local and nationwide availability of “affordable housing” has contributed to government policies that led to boom and bust. The following statement by a former governor of the Reserve Bank of New Zealand is key to our own situation, “The affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land”. (Land use laws --- zoning) See page 14 last paragraph – housing study. Examples of government policies that drive up prices --- Open space laws, zoning laws, height restrictions, minimum lot sizes, historical preservation laws, building permit limits, and farmland preservation laws. (It would not be uncommon for the land underlying the home to be ¾ of the total value.) These limits are placed on the builder who has no choice but to pass on these additional costs to the buyer. These limits are in place due to the implied good intentions of the interest group demanding these limits. Former Congressman Dick Army put it this way, “Demagoguery beats data”. In other words emotion defeats facts and data. The perceived problem of a lack of “affordable housing” by many in the media and in politics bore little resemblance to the real world. There are local situations that are completely out of hand such as on the Left Coast where a 2000 square foot house in need of remodel can be priced and sold for $1 Million, fortunately we do not have this “out of control” situation in Iowa. What effect did ARM have. No I’m not talking about your arm, but Adjustable Rate Mortgage(s). One of the variations of ARM was, the mortgagee had the option to pay less than amount of interest in some months, but unpaid interest was added to principal – UGH. Others were interest only loans – never a good idea. These deals and their variants worked as long as payments were made and housing prices kept increasing. In the event of trouble on the borrower’s part the house could easily be sold for more than the mortgage. (The fish is starting to smell) This could not last. Markets that go up so rapidly can come crashing down quickly not allowing an exit other than foreclosure. With low interest rates and lowered mortgage eligibility standards many low income people and people least experienced in home ownership were subjected to some of the newest and most complicated mortgages. Mortgage Companies, Banks, Real Estate Agents, Wall Street brokers were making profits and big commissions during this time, but that was about to end.

At the other end of the knowledge scale firms like Moody’s and Standard & Poors whose business is rating the risk of investments had a limited amount of data to use to rate these new financial techniques. Shady operators and lenders who took advantage of less knowledgeable homeowners were a problem for the criminal justice system. Yet the concept of “predatory lending” inappropriately was linked to what caused the housing bubble collapse. Not true, but many in politics acted that indeed this was the cause of the housing collapse completely eliminating themselves as having anything to do with the collapse, another example of the Potomac Two Step.

Chapter two – The Politics of the Housing Boom. Was “deregulation” the cause of the “Bust” as claimed by the Politicos? This chapter discusses the politics and policies that go back to 1977.

Good intentions do not feed the bulldog. These new and risky methods of financing replacing traditional methods could not have been put in place without the regulators agreeing to such changes! Mr. Sowell reports that government agencies not only approved the more lax standards for mortgage loan applicants, but government officials were in fact the driving force behind the loosening of loan requirements. (This is becoming a three day old fish) What is “affordable housing”? Each individual knows or at least should know what is affordable. If you can’t afford a mansion, get a house, get a bungalow, rent a house, rent an apartment, or double up with others. Most of us have gone through this maze at one time or another in out lives without any major disruption to our finances. “Affordable Housing” to our political class is that individuals chose their housing and government somehow makes it financially possible for them to have it. An interesting concept and is a furtherance of wealth redistribution. Something tells me this is not going to have a happy ending. (Please. A clothes pin, anyone?)

Mr. Sowell reports advocates of “affordable housing” seldom – if ever – seek to remove government restrictions that lead to higher housing prices. Instead, they seek various ways of either forcing the private sector to charge lower home prices and lower apartment rents or else seek to use taxpayer money to subsidize housing. They do not seek to reduce the government’s role in the housing market, which, in the opinion of the author, would lower home prices and financial costs. They do not mean to lower housing costs but instead conceal these costs with taxpayer provided subsidies or with laws that prevent these added costs being expressed in the prices charged. An aside: found within the many pages of the Affordable Health Care Act is a 3.8% added tax on unearned income. That is, to our present subject, an additional tax on the gain when a home is sold, right now a moot point to those in default or foreclosure.

When did this deal begin? Mr. Sowell reports that government interference began in 1977 with the Community Reinvestment Act (CRA). Like many government programs it began small and grew in scope and severity over years. Many laws and policies start with good intentions and end up with unintended consequences. If only we had people in office who have the capacity to think things through – they would be worth every penny we pay them.

Now the race card gets played. The CRA had no immediate impact, but over years assumptions and provisions provided the basis for ever more insistent pressure on lenders to lend to those whom politicians and bureaucrats wanted them to lend to, rather than to those that lenders would have chosen based on their experience and expertise. These pressures began to build in the 1990s. Studies during the early 1990s were showing a different approval rate for blacks and whites. The pressures began in Bush #41 continued with the Clinton Admin. AG Janet Reno threatened legal action against lenders whose racial statistics raised her suspicions. It was later shown that a substantial majority of black and white loan applicants were approved, but that did not play well with the politicians. Another aside: from another book, Reckless Endangerment the rein of James Johnson as CEO followed by Franklin Raines began the loose leaning practices that would later prove disastourous at Fannie Mae. Mr. Johnson, well connected to the political elite, was able to put in place polices that in the end screwed the very people he was supposed to help. Mr. Johnson was paid over $100M in his nine years at Fannie Mae, running this company into the ground, putting in place policies that would later cause the housing collapse, escaping with impunity. Franklin Raines following was able to earn a sizable sum as well. But we digress.

Banks are federally regulated; therefore they need government permission to do many things that other businesses do as they see fit. This has caused direct and indirect pressure to alter their lending practices to fit the currant political agenda. An aside: The Glass-Steagal act was passed in 1933 among other things separated commercial banks and investment banks. The repeal in November 1999 of provisions of the Glass–Steagall by the Gramm–Leach–Bliley Act effectively removed the separation that previously existed between Investment banks which issued securities and commercial banks which accepted deposits. Experts believe that this repeal directly contributed to the severity of the financial crises of 2007 (TARP).

HUD (Depart. of Housing and Urban Development) also brought pressure on Fannie Mae and Freddie Mac to increase their purchases of mortgages made to low income and moderate income home buyers, setting a target in 1999 of 42%. Community activists get into the act as well pressuring banks to make concessions in money or in kind in order to withdraw objections to bank mergers or opening new branches in other states. HUD became a regulator of Freddie and Fannie in 1992. These government sponsored agencies (GSEs--Freddie and Fannie) were set numerical goals – quotas – for what share of their lending was to be for “affordable housing” mortgages. In practice this means more subprime loans. This was important not only because of the additional risk to the assets of these GSEs, but because also they are dominant players in the housing market and major gigantic financial institutions. There were real dangers to the whole financial market if things went wrong with Fannie and Freddie, whose securities were widely held by other financial institutions in Wall Street and beyond. (The fish is really getting an unpleasant smell) But, not to be alarmed as there was reason to expect, nothing assured, that the gov. (taxpayers) would step in if things went bad. No problem that Freddie and Fannie mortgage guarantee would total more than $2 T, more than the GDP (gross domestic product) of all but four Nations.

In 2003 Treasury Sec John Snow asked Congress to enact legislation to create a new fed agency to regulate Freddie and Fannie. His concerns that these GSEs were dangerously close to a break in the bubble were largely pushed aside. Securities of these GSEs were held by all sorts of financial institutions, insurance companies, pension plans, community banks, thrifts, and commercial banks. The British magazine The Economist warned that America’s house prices have reached dangerous levels and could risk the whole world economy. Also in 2003 Robert J Samuelson, a Newsweek economist, pointed out that about 3,000 banks held Fannie and Freddie debt equal to all their capital. (Wow. The smell is really overpowering) In 2005 Peter J. Wallison of the American Enterprise Institute warned that if Congress did not rein in Fannie and Freddie there will be a massive default with huge losses to the taxpayers. Again these warning were ignored. Representative Barney Frank and Senator Chris Dodd were major players as they were to become chairman of their respective financial committees. Again they did nothing. The politics of James Johnson started in the 90’s were again paying off to the determent of the rest of us. Also, relating to this whole debacle even when the regulators were raising questions to the congressional committees they were largely ignored. As you can read in the book there were connections to banks and campaign funds that influenced politicians to look the other way. Unfortunately, if we wish to find demons in this mess we can find them, but also we see that they escape with impunity – individuals, regulators, as well as the political elite. Corruption was rampant. (This fish is putrid. we need a new fish.)

Chapter three – The Housing Bust. Warning were largely ignored by regulators and politicians – the rest of us were also blindsided.

The following is key to understanding how this bubble came about and how it burst hurting millions “affordable housing” owners that government regulation(?) was supposed to help. The fallout included many investors in REITS and other real estate investors. Mr. Sowell reports: “ The development of lax lending standards, both by banks and by Fannie Mae and Freddie Mac standing behind the banks, came not from a lack of government regulation and oversight, but precisely as a result of government regulation and oversight, directed toward the politically popular goal of more “home ownership” through “affordable housing” especially for low income home buyers These lax standards were the foundation for a house of cards that was ready to collapse with a relatively small nudge.” Mr. Sowell reports the nudge came as the Federal Reserve System, having lowered its own interest rates to an extremely low one percent, began to slowly raise interest rates toward more normal levels in 2004. This rise in rates came to 5.25 % in 2006. Simply this is the rate that the Fed loans to other banks. As financial institutions had to pay more to get money they of course began raising their borrowing rates for home buyers reducing the demand for homes.

Housing prices began falling in 2006 for the first time in more than a decade by record amounts. This drop in prices hit the ones who went out on a limb utilizing risky “creative” financing first. Defaults started coming in at record levels – owners of single family dwellings and of course speculators or “house flippers”. Being overleveraged with a falling market is not a good thing. A continuous trend was being started: In June 2007, foreclosure notices Nationwide rose 87% over the previous year. In California, Mr. Sowell reports, an 800% increase in the number of homes reverting to bank ownership. As the number of homes “on the market” increased demand dropped causing also a decline in price. Banks were losing on average $40,000 for each foreclosure. Banks are in the business of loaning money not managing real estate, so they dumped these homes at what ever they could get. (We have a new fish, and the ice is melting) The rub is that up until this time banks, Freddie and Fannie execs., speculators, house flippers and others were making huge profits and bonuses. You could bet that politicians who favored “affordable housing” were getting campaign donations from the people benefiting from the boom. But when the “dirt” hit the fan they escaped the blame, and to this day blame “under regulation” as the big contributor to the bust. Go figure? -- how can they get away with it? One reason is we just don’t have journalists who really want to investigate certain members of Congress.

Home prices escalated sharply in places like Costal California, Miami and Phoenix, but when prices fell and they fell sharply the repercussion went far beyond these areas. These inflated mortgages were accepted by Freddie and Fannie, and by Wall Street firms--bundled, and then sold as investments across the country and over seas. Mr. Sowell reports that that is why a bank in Germany had to be bailed out when U.S. housing fell (there were a few other foreign banks as well). Buyers included Bear Sterns, Merrill Lynch, Citi Bank and others (TARP anyone?). The value of sub prime mortgages created in 1995 was $65B, and swelled to $332B by 2003. (The ice is melting fast) I hope the reader is starting to see how good intentions can go awry with government and regulatory intervention.

Mortgages made under the Community Reinvestment Act were especially vulnerable (Google CRA). Lending done under the Act’s criteria accounted for only 7% of total mortgage lending by Bank of America, but constituted 29% of its losses. Even owners who had more conventional mortgages were affected indirectly by raising interest rates. These raising interest rates and foreclosures left some of these buyers with a painful question – “Why continue to pay off a $500,000 mortgages on a home only worth $300,000?” Doubly perplexing were those who had big mortgages, and also incurred further risk by maxing out all the value with a home equity loan as well. These people were trapped by choosing risky ways of getting money and --- lost. Mr. Sowell reports: “Professor Stanley Liebowitz of the University of Texas at Dallas puts it: ‘From the current handwringing, you’d think the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job.’ Government was not passively inefficient. It was actively zealous in promoting risky mortgage lending practices”

There are a number of key points on pages 71-76 and beyond, but here the author starts naming names, that although their intentions may have been good the results of their ignorance or incompetence brought about a housing bubble burst that affected not only real estate but all aspects of our economy. In other words government intervention with rules laws and regulations are not thought through. One regulation that may have a favorable impact on one segment may negatively impact multiple segments. The tinkering may never end. Perhaps we will really see the roadblocks that government intervention causes when we see how long it takes for so called “shovel ready” jobs to start. Mr. Sowell states: “Where the current large increases in government spending are said to be for infrastructure, the delayed impact may take an especially long time to be felt, since building almost anything can require complying with all sorts of federal, state and local rules involving environmental studies that must first be performed and hearings that must be held by various agencies, where all sorts of objections must be considered and adjudicated. Predicting when all the money currently being appropriated will actually be spent is especially challenging under current conditions.” If government is really serious about solutions they would streamline the process. We are not holding our breath hoping this will happen. (Our fish is on its own – no ice left)

The author also writes of our National Debt saying that inflation is not the only legacy of runaway government spending. He states that at one time Keynesian Economists downplayed the problem of running up huge national debts by saying “we owe it to ourselves”. That was then. We are in the – here and now. As of 2007 approximately 45% of our debt was held by individuals and organizations outside our country. We have no data for 2011, but suspect the situation to be worse. Mr. Sowell states that this enormous debt means that future generations will have to ship trillions of dollars of their output to China and other countries to whom that debt is owed. Among those legislators specifically mentioned by Mr. Sowell are: Barbara Boxer, Barney Frank, Chris Dodd, Charles Schumer, Mitch McConnell, Kit Bond, John Conyers, Richard Durbin.

One other important point; when writing about the vastness of the stimulus packages, he states “it is not simply spending but deficit spending. The government already had a deficit before any of this money was appropriated, so this is new money, essentially created out of thin air. The potential for inflation is huge”. This will be the cruelest tax of all on the middle class and the working poor.

On last question Mr. Sowell asks in this chapter, “Why there has been such haste to pass a slow-acting bill…….” This will be answered in the last chapter (Again, we need a new fish. whee oooh.).

Chapter four --- Housing Mystiques and Housing Mistakes. Are our politicians and regulators able to learn from the past?

The prevailing vision(?)----A house with picket fence and children playing in the yard, part of the American dream? Mr. Sowell writes that housing is too important in most people’s lives to express it always in dispassionate terms. (Much like a farmer’s land – he is rooted to the soil.) One aspect of the prevailing vision is the notion that unaffordable housing is the fault of the free market, and that government intervention is the only solution. The bipartisan Millennial Housing Commission appointed by Congress in 2000 presented a picture of a National lack of affordable housing. This report required a variety of national programs. Sowell states that in light of the above it is hard to overlook what political opportunities such national programs (i.e. Government) would present to Democrats and Republicans. So it is not remarkable that new laws and new appropriations would require large sums of taxpayer money. When a particular vision becomes widely accepted, many people will have a vested interest – be it financial or ideological, or political. It has been argued that decent and affordable housing will foster family stability, better life outcomes for children, healthy neighborhoods, and lower crime rates. The author states that the most dramatic evidence to the contrary was provided in the twentieth century when massive transfers of households from crime infested neighborhood to brand new public housing. As most of us will remember these public housing projects became new centers of crime and new slums. But, as we have seen in recent years this did not dim the zeal for slum clearance, nor has the repeated massive failures of public housing projects changed the overall vision. It would seem that the guilt of some leads to ineffective programs that cost big time, but do not solve the problem. When that particular way of trying to change people’s behavior by moving into better housing failed, it simply led to other ways of attempting to do the same thing. One of these attempts was Section 8 housing vouchers that enable people to move into middle class neighborhoods. The result was bitter complaints about the behavior of such people by neighbors, landlords, and law enforcement. Some of the complaints were dismissed as just “racism” when the tenants were black, but some of the bitterest complaints have come from black neighbors who moved away from ghettos in order get away from the dysfunctional people that government sent to live among them in their new neighborhoods. It would seem that decent housing has nothing to do with behavior, good citizenship, or character. These values come from the family unit not the dwelling. Not all voucher tenants were dysfunctional, but it only takes a few to make life miserable for others.

Long standing social crusading that government intervention in the housing market would create “affordable housing”, and protect the vulnerable has played a major role in pushing policies of lowered mortgage lending standards that led to the housing market collapse we see today. The repercussions of this collapse are seen throughout the economy in lost jobs, retreating retirement plans, and wages. Democrats have been prominent in these crusades at both the local and national level, but some Republicans have been part of the picture as well. (One is Jack Kemp, HUD Secretary under Pres. Reagan.) “It was none other than George W. Bush who said in 2002: We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.” Six years later, when his own Sec. of Treas. explained the magnitude of the problem he asked “How did we get here?” Neither he nor many politicians including the media saw any connection between the housing crusades and the economic crises now facing us. There were some who sounded warnings but they were rebuffed by Rep. Barney Frank, Sen. Chris Dodd, Rep. Maxine Waters, Rep. Charlie Wrangel and others.

We now get to the part in this chapter where the Author writes about protecting minorities. There is a long standing belief that lending institutions existing standards and practices discriminated against non-white applicants for mortgage loans. Statistical studies which seemed to support this view got wide publication in the media. Criticisms of these studies receive little if any attention. This discrimination card plays into the hands of certain special interest groups. Such claims, if not withdrawn after financial and other concessions would take years of law suits, costing vastly more sums than giving in. Jesse Jackson has been prominent among those using this tactic. He has gained millions of dollars in donations from financial institutions. He is not alone; organizations such as ACORN (Association of Community Organizations for Reform Now) have been in the mix as well. The Los Angeles Times reports: “ACORN….has used the CRA (Community Reinvestment Act) as leverage to compel banks to create pools of loans for low- and moderate-income families. Its efforts have generated about $6 B in loans to these borrowers, while generating funds for ACORN’s nonprofit housing corporation, supporters call this a win-win scenario; critics say it is legalized extortion.” There appears to be discrimination only in the eye of the liberal opinion page writer, credit scores, net worth, and other financial facts don’t matter. We do not seem to see data from Asian American applicants in any study. The reason is that the percentage of successful Asian American applicants exceeds the percentage of Caucasian applicants. No one would suggest the Caucasian applicants were discriminated against in favor of Asian Americans – not hardly.

What ever the vision or the accompanying rhetoric, what people say or what they intend is far more important than the actual consequences of their actions. However, irrelevant political rhetoric may be to the facts it is apparent that political rhetoric has played a major role in the creation of housing policies that have been disastrous. One of the biggest differences between economic decisions in the “market” and political decisions is that “costs” are inescapable in the “market” but are ignored in the political side. The weighing of benefits against costs, is common and inescapable in the economic decisions of individuals, families, or corporations, but are completely absent in political decisions of government. These costs may not involve direct expenditures by the government itself, but can entail billions of dollars to the private sector when nationwide policies are involved.

“It is very doubtful if many in academic communities who have campaigned zealously for land use restrictions under any of the heady and lofty labels used for these restrictions, have any idea that they are in any way responsible for the dire financial conditions in the country today or for the hundreds of thousands of workers who have lost their jobs. Social crusaders are not forced to confront the consequences of their choices, even in their own minds or consciences much less pay a tangible price for the havoc they leave in their wake while feeling noble.” Perhaps the most important paragraph in the whole book!!!

Chapter Five --- The Past and the Future. Is deregulation the culprit or is it government intervention?

This chapter is basically a summary of the previous four chapters. It is very important to understand the causes of the various financial calamities of this and the previous centuries. Progressive/liberal theories persist even though evidence from the past lays the groundwork that history will repeat if we do not learn from it. Progressives are not just found in the Democrat Party – the Republican Party has its own as well. “Bad ages to live through are good ages to learn from.” Unfortunately many of the same remedies that only prolonged the Great Depression are in use today by the present administration. Reference: The Forgotten Man by Amity Shlaes

It seems that conventional wisdom holds that the housing bubble bust was caused by deregulation, but was it? Lending standards were lowered because there was a vision that there was an “affordable housing” crises. It is just too easy to blame the previous administration for everything that has gone bad. This denies that Freddie Mac and Fannie Mae had anything to do with the toxic assets that came about. This thought also denies that meddling in the housing market by government had no effect on the pending collapse. In this and other books on the housing bust two names keep coming up --- Representative Barney Frank, and Senator Chris Dodd. These two men were chairman of the committees that were supposed to oversee finance. (Dodd Chrm of Senate Banking Committee 1997-2006 and Frank Chrm of House Financial Services Committee 2000-2011) Mr. Sowell writes “that those saying that better regulation could lead to better results are voicing an attractive truism that is very misleading in the real world. No doubt perfect government regulation could have solved the housing market problems, but a perfect operation of the free market could have solved those problems as well.” Mr. Sowell asserts that it was indeed government meddling that caused the housing market to eventually fail. The pain caused by doing nothing would likely have been severe, but it would have been over soon and a recovery would have been on the way instead we are stagnant, and the housing market is still looking for a bottom --- Government programs keep on coming with no improvement while spending trillions of dollars we do not have.

(Look up the depression of 1920 and how President Harding addressed it, and President Coolidge who followed.)

Why did so many monthly mortgage payments stop coming? Because mortgage loans were made to more people whose prospects of repaying the loan were less than under the old rules. There are no more - no interest only loans, or more - no down payment loans or other creative financing tricks.

Survival in the market often requires recognizing mistakes and changing course. Survival in politics requires denying mistakes, continuing the currant policies, adding new ones to correct the old ones, and then blaming the bad consequences on others. --- Or unbelievably blaming a lack of government regulation. There was very little pressure to change course in the housing market. Many people made lots of money during the boom and donated to the politicians who would allow the risky practices to continue. The warnings were sounded, but were weak and ignored by those who had the power to change, but decided to steer a different political course one that has caused tears throughout the land. In this sub chapter “Consequences” Mr. Sowell states “Politicians in Washington set out to solve a national problem that did not exist.” That is: a shortage of “affordable housing”. He states that what caused the illusion was that in particular localities around the country housing prices skyrocketed to the point where people had to pay half their income to buy a modest-sized home. He asserted that these local price skyrockets were largely due to local, state, and federal restrictions on land use. Government does not attempt to lower costs, but to subsidize the higher costs associated with their rules, thereby hiding their inefficiencies and incompetence.

Mr. Sowell has a portion of this chapter that deals with the depression of 1929 through 1946. There is a great deal of misinformation on this era. We suggest interested readers go to The Forgotten Man by Amity Shlaes as well as closely reading Mr. Sowell account. The Fed Chairman, Ben Bernanke, is supposedly a student of this era. If you read the book by Ms. Shlaes I am sure you will not have as much confidence in this man’s ability to steer us though the difficult times ahead. Consider the jobs bill proposed by our President. Mr. Sowell reports that for the first 21 consecutive months of FDR’s administration, unemployment never fell below 20%. The fallacy of those who see government-created jobs as an answer to unemployment is in regarding such jobs as a net increase in employment. But, the money that pays for government-created jobs is taken from the private sector, leaving less demand and less employment there. Further he states that huge increases in government-created jobs may make little or no net difference in mass unemployment. (If private sector workers are fired or forced to pay more for their benefits should we expect government workers to be exempt? The latest jobs bill seems to be protective of that government segment. Regardless of our empathy for those unemployed – when government does not sacrifice as well – working taxpayers are put under more pressure.)

The author also reports that: Whatever its shortcomings economically, what government job creation programs can do politically is create a large classes of people beholden to the government and likely to vote for those who gave them jobs in hard times. The political success of the New Deal is beyond dispute. That FDR could be re-elected in a landslide in 1936 and re-elected again for a third term in 1940, despite never having gotten unemployment below single digits during his first two terms, is a sign that President Obama may also be able to succeed politically, even if his policies turn out to be an economic disaster for the country as a whole. Please re read this paragraph—this is very important to grasp. Fifty three percent of the country pays federal income tax the rest pay nothing or get tax payments. Why would anyone on the receiving side vote for financial/tax reform? This is the chief reason why it is so hard to put a rein on government spending. We should not be spending more than revenue except during national emergencies. During a four year period of President Clinton’s administration we had balanced budgets, no one was complaining then about pet programs being shorted or Grandmas being thrown over a cliff, or Medicare people forced to eat dog food. Why? Could the reason be that President Clinton was a Democrat?

An interesting development reported by Mr. Sowell is: “Within a month after the Obama administration took office in Jan. 2009, a spending bill involving hundreds of billion of dollars and over 1,000 pages in length was passed in two days.” We don’t know about you readers, but it is beyond us to read a bill of that length and fully understand what the consequences to the citizens will be. Are these people you vote for really more intelligent than the average bear? To this day we are not sure where or who this money went to. Read page 142.

This is a key paragraph, page 144 --- “Lending money to American homebuyers had been one of the least risky and most profitable businesses a bank could engage in for nearly a century. It was the massive intervention of politicians in the housing market that changed that disastrously, not only for banks but for the entire economy.” What is it that we can trust politicians to do well??

Very important to grasp – “……is it likely that the national politicians of our own times, who for years made “home ownership” the touchstone of housing policy, will acknowledge any responsibility for the financial disasters and widespread unemployment today? What this means is that the voting public must at a minimum be skeptical of political spin, no matter how often it is echoed in the media.” ….”It is a caution especially apt when someone is pushing the political crusade of the day as an overriding “good thing” whether home ownership, mortgage foreclosure mitigation or a restructuring of the whole economy.” The old adage “be careful what you wish for as you may just get it” applies.

In closing from a British historian, Paul Johnson: --- “The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false.” It is so important that we as voters educate ourselves so that we are not fooled by the rhetoric of the glib, and that we recognize the wedge issues and ignore them for the benefit of us all.

The old saw, “if we do not learn from the past we are doomed to repeat it” is truer than ever. Be skeptical of the promises. Rely on yourself to improve your position. For readers interested in a more complete study of the Housing Crises we recommend Reckless Endangerment by Gretchen Morgenson and Joshua Rosner.

Benton County Advocates

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A word about the Benton County Advocates:

We are a small group of concerned citizens who meet once a month. We call ourselves, Benton County Advocates. At our meetings we will discuss the issues of the month from National to State and Local. In the past we have held town hall meetings discussing health care issues. At this forum we had a local physician, pharmacist, hospital administrator, and insurance agent. State Auditor David Vaudt was invited to one forum discussing the financial state of Iowa. This was very informative, and we had a good turn out. We had a forum by the CEO of EIC REC, Mr. Harry Ruth, who spoke to us about the effects of legislation and regulation causing higher electric rates that don’t necessarily improve air or water quality. We also review books on economics, housing and other subjects of interest to the group. Our meetings are held at the Mike and Carolyn Hibbs home usually the fourth Thursday of the month at 7:00 PM. Any interested person is cordially invited to attend. Our frequent members include: Mike and Carolyn Hibbs, Bill Keller, Barry Adams, Dave and Mary Coots, Rick and Betsy Hadley, Ken and Liz Stark, and John Stiegelmeyer. If you are interested in attending our meetings please contact one of the above or just show up.

Respectfully,

Benton County Advocates