The Gang’s All Here
Last week, the Wall Street Journal carried an opinion piece by Peter J. Wallison titled “The Housing Gang Is Getting Back Together for Another Bust.” Despite knowing that some anonymous WSJ editor came up with the title, the headline certainly grabbed my attention, as did the byline. Wallison not only served on the Financial Crisis Inquiry Commission in 2010, he also famously forewarned of the impending crisis of Fannie Mae as early as 1999. His views on the causes of the subprime mortgage debacle are controversial to be sure, but his knowledge of the sector makes what he writes worth reading.
Back in my inaugural post for this site, Saving Capitalism Through Exploration, I noted in passing that the Great Recession of 2007–09 had elicited competing narratives to explain the underlying factors that produced the crisis. I conceded that the opposing takes each had a certain plausibility to them because of the deeply muddled context in which the crisis emerged. The economic sectors at the heart of it all, housing and finance, had been inextricably mixed between government regulations and market incentives for many decades. Wallison’s recent account of the crisis, Hidden in Plain Sight, makes a comprehensive and convincing case that, whatever else we assign as causes precipitating the crisis, it was not a lack of regulation.
In the time since I wrote that initial post, my conviction that we are typically asking the wrong questions has only grown deeper. I’m certainly sympathetic to Wallison’s narrative, which contends that government interventions into the housing market in the form of government-dictated affordable housing goals and enforcement of the Community Reinvestment Act created the subprime instability and exacerbated mispricing of collateralized debt. Whether his analytic case definitively points to the trigger that set off the interlocking crisis or not, the fact that government action in the private market causes distortions of the price signaling system is unquestionable. It is literally the purpose of government intervention—to impose an external fix on the allocation or exchange of goods or services in a particular market or to reshape the ways in which that happens to serve some non-market goal (take your pick from the list of stability, equity, affordability, broadening the American Dream, taking care of the most vulnerable, or whatever is the flavor of the day).
Leaving aside the analysis of the causes of the crisis, one thing was and is certain—the response to the crisis, as Robert Higgs so eloquently demonstrated years ago, will be to ratchet up the regulations and controls.
In the wake of the subprime mortgage crisis of 2007–08, Congress passed a blitz of new legislation, nominally aimed to correct the flaws of “the system” that produced the crisis in the first place. In popular rhetoric, that system was Wall St. greed at the expense of Main St. need. In reality, the system was a tangled web of government mandates, policies, and programs dating back at least as far as the New Deal, whereby politicians and regulators had created massive distortions in the market for housing and had disrupted price signals through Fed monetary policy, culminating in a worldwide financial crisis.
The Housing and Economic Recovery Act of 2008, one of the earliest measures adopted by Congress and signed into law by President Bush, among its many provisions, created a new independent regulatory agency, the Federal Housing Finance Agency (FHFA). Almost immediately, FHFA director James Lockhart placed Fannie Mae and Freddie Mac into conservatorship, an act that Washington Post reporters described at the time as “one of the most sweeping government interventions in private financial markets in decades.”
Before we continue the story and turn back to Wallison’s piece, let’s pause for a moment to consider the various adjectives in that description. The authors were correct that the FHFA, the Dodd-Frank Act, the Troubled Asset Relief Program (TARP), the Fed’s “Quantitative Easing,” the American Recovery and Reinvestment Act, and dozens of other new laws constituted one of the most sweeping intervention programs in years. Yet that little adjective—”private”—is so conspicuous. By no stretch of anyone’s imagination were the financial and housing markets so untouched and uncontrolled that they could be deemed “private.” The convoluted history of the Government Sponsored Enterprises (Frannie Mae, Freddie Mac, and Ginnie Mae) stretched back many decades. Likewise, the entire financial system—from the currency used by citizens to commercial deposits to interbank loans, from simple interest on grandma’s savings account to reserve ratios—hewed to Fed and Treasury policy, to say nothing of SEC controls on the securities industry.
The New Ratchet, Same as the Old
But let’s return to the ratchet. As Wallison notes, the last Senate-confirmed Director of the FHFA, Trump appointee Mark Calabria, was attempting to spin off Fannie Mae and Freddie Mac. The Biden administration terminated Calabria and replaced him with an acting director—but only after having obtained a Supreme Court ruling confirming the executive branch’s power to fire the director of an independent agency despite Congress’s attempt to prevent that in the text of the law. For more on that curious turn in administrative law, see here.
The new acting director, Sandra Thompson, immediately reversed the process that Calabria had initiated. Wallison points to her initial statement: “There is a widespread lack of affordable housing and access to credit, especially in communities of color. . . . It is FHFA’s duty through our regulated entities to ensure that all Americans have equal access to safe, decent, and affordable housing.” As Wallson notes, “it seems clear that the GSEs will once again be deployed—as they were before 2008—as instruments of the government’s efforts to increase affordable housing.”
To get our first hint at why the mainstream debate is asking the wrong questions, I want to turn back to some statements that Mark Calabria made in the wake of his termination. On the “Kudlow” show on Fox Business, Calabria claimed “There's a smart way to expand homeownership. That's growing incomes. That's growing jobs. And there's a crazy way. That's getting rid of lending standards, getting rid of down payments, and to me, that'll be destructive to the very families who will get those mortgages. It'll be destructive to those communities." He went on to brag that while he oversaw the FHFA, the country experienced the largest increase in annualized homeownership among African-Americans. A few months earlier, the GOP had promoted “growing homeownership” by reducing federal interventions in lending markets, leaving zoning up to local government, and maintaining or increasing incentives (read tax policy) for homeownership. Going back to the 2016 Republican platform, one of the GOP’s biggest fears was that zoning laws would be nationalized so that Democrats could “socially engineer every community in the country.” Apparently, social engineering isn’t so bad if it’s done by your state, city, or county government.
There isn’t a debate, at least not one that represents a consideration of the fundamental issues.
So, as Wallison correctly points out, we should prepare for a recycling of old trends, but “this time there’s a more ominous twist.” The GSEs have undertaken to back loans for the new normal of “affordable housing.” What is the limit of “affordability” you ask? Why, one million dollars, of course. After all, just look at the trendline in the house price index.
What could possibly be making houses so expensive? Shouldn’t the market actors get a clear signal that more people (perhaps maturing millennials who want to stop renting, have children, and settle down?) want to buy houses and therefore start producing them? Why hasn’t that happened? A good answer was offered back in August by Eli Dourado in the New York Times. As a culture, he notes, “we have lost the imperative to transform the physical world.” In recent decades, “the soft technology of the internet has marched forward, development of real stuff—of steel and concrete—has slowed, hampered by laws that privilege the status quo.” (It turns out, despite Zuckerberg’s Meta-desires, you can’t actually sleep, cook, and shower in a virtual world.)
As Dourado illustrates, a whole passel of regulations on building have cramped not only the housing market, but other (actual) infrastructure projects as well, from electric grids to rail lines and roads. Worst of all for housing, he notes, is zoning laws, which not only raise costs and reduce supply, but also perpetuate racial and income segregation across the country. “To become a nation that builds,” he notes, “we must tear down the regulatory obstacles.” The insanity of zoning laws and their detrimental effects is not going unnoticed. Even the surprising video op-ed that the New York Times ran in November, which called out Democrat-run states on their hypocrisy on housing, tax, and education policy, highlighted the role of zoning in distorting the housing market.
To think that zoning is the only issue, though, would be to ignore all the other regulatory regimes that affect these markets. Heck, just last week the Commerce Department announced that it was doubling the tariff on Canadian softwood lumber—you know, the exact kind of wood used in light construction, for things like (checks notes) housing. This type of regulatory shenanigans is at the root of the misnamed “supply chain” crisis that has been periodically pressuring the economy since the start of the pandemic as well. As Cato’s excellent Scott Lincicome recently noted, if we want to know why the arteries of commerce have so quickly seized up and failed to function, the regulatory sclerosis that pervades our systems of trade and shipping of retail goods (including, not surprisingly, rigid local and state zoning laws that inhibit warehousing and storage construction, as well as something as simple as stacking containers awaiting trucks to haul them away) is our basic answer.
To push beyond the status quo, we have to start asking the more fundamental questions—what is the justification for a government, whose function is to uphold individual rights, to incentivize or otherwise determine the specific share of housing of its citizens that is taken up by primary home ownership versus renting? Or consider another angle: if current regulatory policy has caused a startling increase in home prices, what makes anyone believe that subsidizing through additional regulations the purchase of ever-more expensive homes with the guarantee of the American taxpayer is going to solve that problem. Perhaps it is time that we set aside these specific issues and turn again to the basics and ask our government officials: what is the moral justification for government to intervene in the private arrangements of its citizens on something like where they house themselves?
There is no point in asking, you’ll get no reply. On the questions that matter, they’re all out to lunch.