Helping the housing bubble along

Regarding the housing crisis, Mr Brian Beutler asks:

Is this crisis truly devoid of any partisan responsibility? In something like a mathematical sense, I'm prepared to pin most of the blame on Greenspan. But isn't at least some of this political and cultural in origin? To me it seems very much as if the Bush administration and Congressional Republicans (and plenty of Democrats) have done everything they can--through bankruptcy legislation and various other regressive policies--to assure creditors of all species that the government stands firmly behind predatory lending, consequences to the poor and uninformed (and, of course, to the economy) be damned. That must have had some impact, yes?



In a word, no.

I wouldn't even pin most of the blame on Greenspan. It's not clear how much of an effect the money supply had on the mortgage bubble; the starring role seems to go to the river of capital pouring in from abroad, mostly courtesy of Asian central banks who were manipulating their exchange rates by buying dollars, and then parking the funds in various asset classes. If interest rates were too low, this should have staunched the flow by making US investments less attractive; they certainly didn't do that. I need to go back and re-read my Monetary History of the United States (where is that box . . . ), but my impression is that the Fed had a similar problem in the 1920s. They actually did raise interest rates quite a bit in an effort to choke off the stock market bubble, but all this did was encourage foreign capital to pour into the United States, to buy stocks and be loaned out on margin.

As for the federal government, I've been wracking my brains, and I've yet to come up with any Bush administration policy that credibly made the housing bubble worse. If anything, his biggest policy achievement should have tamped down the bubble. The Bush tax cuts, by reducing tax rates, also substantially reduced the value of the mortgage interest tax deduction. That should, in turn, have reduce the amount that people were willing to pay for a house (though this is complicated, because of course people might want to spend their extra post-tax income on more housing).

The biggest problems with mortgage lending seem to have occurred during the mortgage brokering process, and mortgage brokers are regulated at the state level. Many of the worst-hit states are controlled by Democrats.

The bankruptcy code, including the recent reform, just doesn't have much effect on mortgages. Bankruptcy is only tangentially concerned with secured debt, like mortgages; that is what the foreclosure process is for. The bankruptcy reform did (in one of its least useless provisions) put a stop to a tactic that people used to use in order to avoid eviction or foreclosure: serially declaring Chapter 13 every time the bailiffs got close. But this wasn't all that common, and at any rate, not even the consumer advocates I interviewed on the topic wanted to defend that particular stunt.

But at any rate, the level of the homestead exemption--which governs whether or not you get to keep your house in a bankruptcy--is also set at the state level. The only major change the recent bankruptcy reform made to this was a small provision aimed at OJ Simpson, which prevents people from moving to states with an unlimited homestead exemption in order to shelter income from criminal and civil recovery. (This being how OJ dodged Ron Goldman's family lawsuit.) In most states you can declare bankruptcy without losing your house, and you can certainly lose your house without declaring bankrutpcy, and neither has very much to do with the Bush administration.

Some people are criticizing the Bush administration for not doing anything about the housing bubble--setting up an agency to keep the banks from lending so profligately, say. (Though I notice very few of them noticed we needed this in, say, 2003.) But I don't think anyone credible has a very good theory whereby something the Bush administration did actually produced the housing bubble. Human beings are natural born speculators. They don't really need all that much help to lose their heads.