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Book Review 174: The Housing Boom and Bust

November 27, 2010 - Harry Eagar
THE HOUSING BOOM AND BUST, revised edition, by Thomas Sowell, 244 pages, Basic paperback, $15.95

Thomas Sowell may be America’s least distinguished economist, but he’s also probably America’s best-known shill for let-’er-rip capitalism. In “The Housing Boom and Bust,” he rides all the familiar hobbyhorses, offering up a collection of misinformation, significant omissions and revisionist history to convict poor working people of bringing down the world economy.

And you thought it was Wall Street! Silly you. Sowell will set you right. Far, far right.

It is always difficult to know where to start with Sowell: crazy theory or misleading practice?

In this case, perhaps we should start with patent absurdity. Blaming the borrowers -- rather than the lenders, who, according to Sowell’s own Smithian beliefs are supposed to be primarily concerned with their own best interests -- Sowell advises against lending to poor people. So old-fashioned, not lending to people unless they don’t need to borrow.

In fact, of course, lending to people with small incomes can be quite safe. Even mortgage lending to people who offer nothing down can be safe. Millions of GI Bill loans show that. Lending to people without prospects of stable income is what gets a lender in trouble, and, of course, the result of globalization and the wrecking of the union movement has turned America into a nation of people without stable employment. (The way it has worked out, even civil service jobs have proven to be unstable. Teachers have been laid off by the hundreds of thousands.)

The invisible hand -- which predictably, shows up almost on the first page -- has been busy shooing people onto the breadlines. In my formerly prosperous county, close to 10% of residents are on the breadline, and our formal unemployment rate is a third lower than the purported national rate. (Which, in reality is about half the real rate.)

But loans were made here to Sowell’s favored few, the rich. How’s that working out?

Not so great. There have been around two thousand residential foreclosures. The aggregate arrears on those mortgages are little greater than the arrears on just 2 commercial mortgages. If you cannot trust billionaires to pay their debts, who can you trust?

Sowell doesn’t say.

In any event, the housing boom and bust did not develop the way Sowell says, or even where Sowell says.

According to him, it was the Community Reinvestment Act and the implicit guarantees that Wall Street assumed for the private businesses Fannie Mae and Freddie Mac that caused the problem. How the CRA forced bankers to lend to deadbeats in Iceland, Ireland, Spain, Romania and even that capitalist bastion China is not explained. But even closer to home, Sowell’s description of how government intrusion distorted markets and caused trouble doesn’t stand up.

He constantly reverts to Dallas, where housing prices did not rise so much compared to, say, San Jose. Depends when you look. Dallas real estate took a beating after Reagan deregulated the S&Ls.

According to Sowell, evil rich people passed sumptuary ordinances (preserving open space, for example, or restricting pollution) and this made life more comfortable for them but raised housing prices for -- well, I suppose, for them. This happened on the coasts, and that was where the deepest trouble developed with residential mortgages.

Except, when you look, some of the worst mortgage problems developed in Las Vegas and Phoenix, and hardly anybody but Sowell imagines that coteries of insiders were manipulating government policy to restrict development in Phoenix and Las Vegas.

The numbers do not lie. There were plenty of predatory loans made to unsuspecting immigrants from Guatemala, and we can all hope those lenders serve long stretches in prison for it, but loans to poor people did not cause the crisis, or even add measurably to it.

Sowell criticizes government policies (notably the Community Reinvestment Act) for distorting the market by artificially encouraging home ownership, instead of renting. There are about 100 million residences of all kinds in the United States, and even Sowell doesn’t claim that rates of home ownership went up by more than a couple of percentage points: one million to two million dwellings.

This is equivalent to about one year’s new construction, a serious matter but hardly enough to wreck the housing market.

However, according to Bloomberg News, in early 2010 there were 18 million unoccupied dwellings in the United States. This was obviously a market failure.

Furthermore, CRA-mandated loans make up only a small fraction of all defaulted mortgages. All the mortgages I have examined were either refinanced, or had second mortgages; in some cases, a refi, a second and an equity line of credit to wring the last penny of notional value out of the real estate.

Since CRA does not require banks to hand out home equity lines of credit, or give them points for second mortgages, it is a falsehood on Sowell’s part to finger the CRA for the problem.

Even lenders with only a minimal sense of self-preservation should have been cautious about second mortgages. They used to be.

The truth is, under the mantra of unleashing the power of the financial markets, the government stood aside from the cautious policies it had adopted during the New Deal -- symbolized by repeal of the Glass-Steagall Act in 1999 -- and let the financiers run free. Anybody who knew the history of finance in 1928 could have predicted the result. The invisible hand very nearly pushed the economy over a cliff.

Even if all the bad things about CRA that Sowell alleges were true, the bubble’s rise could have been slowed, and the collapse would have come sooner and been softer, if lenders had merely exercised simple principles of prudent practice by declining to underwrite the desire of desperate borrowers for more credit.

Phony moralists like Sowell are paid to criticize hardworking landscapers for taking out too-large loans for nothing down, but I was watching when mogul Sam Zell took over Tribune Cos. with only about 4% equity, and I don’t recall any of these moralists scolding Zell for his recklessness.

In the end, that’s all “The Housing Boom and Bust” amounts to, all that Sowell’s entire career as a publicist has ever amounted to -- a plea for different rules for the rich, at the expense of working people.


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