Diary

What Caused the Housing Market to Collapse?

Thomas Sowell is one of the leading economist in the country and has authored many books. His book “The Housing Boom and Bust” covers why he believes the housing market collapsed in 2007. I have always liked Sowell’s views since he is a strong believer in laissez-fair economics. In other words he believes that the government should not interfere or should take a “hands off” approach to the economy. Government intervention only leads to more issues and problems. For example, he believes that the Obama approach to be active and dump trillions into the economy is not the best solution. Although the economy will eventually turn around and it is possible the Obama plan could aide in the recovery (which remains to be seen), their approach will cause other problems. Not only will Obama have to increase the tax on wealthy Americans to pay for the recovery, Sowell insists that all Americans will be taxed in the form of inflation. Any time the government injects trillions into the economy, the end result will be inflation. Inflation means the price of goods and services in this country will go up. For example, when food prices go up at an alarming rate, this is going to affect everyone rich and poor. With inflation, every American will see the value of their income decrease.

 

I had been preaching Sowell’s view on Obama’s economic interference from the onset of his ambitious spending spree. Sowell also has an interesting take on the housing market collapse. Liberals have blamed the collapse on lax regulation of the Wall Street banking system. Conservatives have blamed the collapse on lax regulation of government sponsored lending giants Fannie Mae and Freddie Mac. Moderates believe the collapse is a combination of the two. Sowell says that government regulation actually caused the housing market bust. Interestingly, Sowell points to many Clinton-era personnel regulating Fannie and Freddie which forced them to make housing loans to questionable borrowers. Government regulation was trying to make sure every American had the opportunity to buy a home and live the American dream. Hence, lending guidelines were relaxed so people with questionable credit could buy homes which eventually they could not afford. At first, the regulation helped the housing market boom as more and more new home owners were able to capitalize on mortgage loans they could not qualify for in the past. The housing market grew at astronomical rates for over a decade. At this point, Americans got greedy and thought they could make money by intentionally buying homes they could not afford with adjustable rate mortgages and when the mortgage rates adjusted, they could sell the home at a profit. That was all great until the price of homes collapsed and the value of the mortgage was worth more than the home. Thus, Americans either foreclosed on their homes or sold the homes and endured thousands in losses. Thus, regulation flooded the housing market with two types of people that caused the collapse: those people with bad credit that eventually defaulted on their mortgage, and investors or speculators trying to make a quick buck by buying housing they could not afford, but sell for a profit.

 

None of this would have happened had the government not interfered in the housing market. Laissez-fair economics is the only way to keep the federal government from spending and growing out of control. In fact, laissez-fair should be the model for the government to follow in other arenas such as foreign policy. The government should only get involved, if and only if it is absolutely necessary for national security reasons.

 

My Blog: http://patrickbohan.blogtownhall.com/ (The Theory of Mediocrity)

My Book: Is America Dying? (Barnes and Noble, Amazon.com)