Attempts continue in the blogosphere to deny the government’s central role in the housing collapse and ensuing crisis. The latest is by Washington Post reporter Suzy Khimm: “No, the affordable housing push didn’t cause the subprime crisis.”
What Ms. Khimm and others ignore is the inherently risky nature of real estate lending and the government’s well-documented role in weakening credit standards.
One can explain what happened in three sentences:
1. The private sector has a long history of booms and busts in real estate, which demonstrates it is perfectly capable of doing incredibly dumb things on its own, without the government’s active encouragement.
2. While the private sector usually can sustain dumb things for 3 years or so before defaults soar, it took government policies promoting dumb and irresponsible things such as no down payment loans with 30-year or longer amortization terms to promote a housing boom which continued unabated for 13 years in nominal dollars and 9 years in real dollars.
3. This created the largest housing bubble in our history followed by the largest housing bust.
Here are excerpts from a 2007 NYT op-ed entitled “‘Irresponsible’ Mortgages Have Opened Doors to Many of the Excluded” by Professor Goolsbee, who went on to become the chief economist for the President’s Economic Recovery Advisory Board. He was also the chairman of the Council of Economic Advisers and a member of the Cabinet. This was written at a time when promoters of the government’s efforts to use loosened underwriting to expand homeownership were still taking credit for the seemingly positive results. He noted with approval: