S/He who forgets history is condemned to repeat it.

S/He who forgets economics is condemned to repeat history while broke.

Thomas Sowell field-strips the Financial Crisis. Like so many crises, it’s an unintended consequence of the response to a non-existent crisis – the”Affordable Housing” crisis (remember that one? If you voted for Obama, I bet not) a few years back.

When the political crusade for affordable housing took off and built up steam during the 1990s, the share of their incomes that Americans were spending on housing in 1998 was 17 percent, compared to 30 percent in the early 1980s. Even during the housing boom of 2005, the median home took just 22 percent of the median American income.

What created the illusion of a nationwide problem was that, in particular localities around the country, housing prices had skyrocketed to the point where people had to pay half their income to buy a modest-sized home and often resorted to very risky ways of financing the purchase. In Tucson, for example, “roughly 60% of first-time home buyers make no down payment and instead now use 100% financing to get into the market,” according to the Wall Street Journal. Almost invariably, these locally extreme housing prices have been a result of local political crusades in the name of locally attractive slogans about the environment, open space, “smart growth,” or whatever other phrases had political resonance at the particular time and place.

Pick a housing market with high prices and terrible rents.  You’ll find government intervention in some form or another – New York’s rent controls, Portland’s “smart growth” – behind most of ’em.

Where housing markets have been more or less left alone — in places like Houston or Dallas, for example — housing did not take even half as big a share of family incomes as did comparable housing in places like the San Francisco Bay Area, where heavily hyped political crusades had led to severe restrictions on building. It was in precisely these extremely high housing-cost enclaves that the kind of people for whom the national housing crusade expressed much concern — minorities, low-income people and families with children — were forced out disproportionately.

Few things blind human beings to the actual consequences of what they are doing like a heady feeling of self-righteousness during a crusade to smite the wicked and rescue the downtrodden.

And that’s where the real problems – the real crisis – began.

Even where loudly proclaimed concern for the poor and minorities gave impetus to the drive for over-riding traditional mortgage lending standards, this is not to say that the poor and minorities were the sole beneficiaries or even the main beneficiaries. When you open the floodgates, you cannot tell the water where to go. Housing speculators — “flippers” — found the new and looser home mortgage rules a bonanza. So did many others. It is by no means clear that the poor or minorities came out ahead at all, after the housing boom turned to bust and many were left with mortgage payments they couldn’t meet on homes they couldn’t afford.

With rich rewards available — politically, ideologically, and financially — from the “affordable housing” crusade, there were ample incentives to keep this crusade going for years. Meanwhile, various special interests found ways to benefit themselves from all this, whether as home builders, real-estate investors, or others, and therefore added their voices in support of the open-ended goal of more home ownership through various ways of achieving, or seeming to achieve, affordable housing.

So how do we dig out of this government-created crisis?

Well, not through more government action:

While some congressional Democrats have proposed a moratorium on mortgage foreclosures or allowing judges to change the terms of mortgage contracts, Senate Republicans have proposed “providing government-backed, 4% fixed mortgages to any credit-worthy borrower.” What these proposals from politicians of both parties all have in common is an utter absence of any serious consideration of the repercussions in multiple directions of arbitrary government fiats.

Read the whole thing.

Better yet, find your Congressperson, and make them read it before you go all Jack Bauer on them.

This entry was posted by by Mitch Berg on Tuesday, May 12th, 2009 at 7:33 am and is filed under Business, The Economy and The Markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.