Monday, December 24, 2007

Who's Really to Blame for the Housing Bubble?

Blind into the Bubble was written by Paul Krugman and published in the New York Times on Friday, December 21, 2007.

On Tuesday, the Federal Reserve Bank proposed added regulation over lending practices to protect consumers from deceitful tactics. In his article, Paul Krugman lists reasons why the Fed’s actions are too-little-too-late. He presents a short list of candidates that are responsible for the housing boom and associated predatory practices of some mortgage lenders since 2003:

1. Alan Greenspan – then Chair of the Federal Reserve

2. Five government agencies, including James Gilleran at the Office of Thrift Supervision, in charge of supervising the financial industry.

Krugman argues that regulation is the only way; there is a failure in the mortgage industry that can only be fixed by government intervention. It was free markets that pushed the industry into a whirlwind of bad banking practices.

Krugman is not the only economist blaming Alan Greenspan. In an interview Joseph Stiglitz said, “Alan Greenspan really made a mess of things. He pushed too much liquidity at the wrong time.”

What Krugman and other economists fail to mention is that the Clinton administration (Bill, of course) propelled the consumers toward risky loans in the first place. Perhaps Greenspan and the government supervisory agencies further deepened the lending glut, but they were not the instigators; Bill Clinton was. In August 1997, Congress and Bill Clinton signed the Taxpayer Relief Act. Among other things, this act exempts married couples filing jointly from paying taxes on the profits earned by the sale of a residential home for up to $500,000. That key piece of legislature changed the incentive to buy and sell personal real estate indefinitely, pushing consumers toward riskier behavior

So, the blame is misplaced. It is one capital gains tax law (a law that I would not want repealed) that initiated the real estate boom - not the fault of free markets. The tax relief act, along with poor decisions made by persons in key positions, fired up the housing boom and launched us to where we are today.

I am thankful that there is a newspaper out there (the Wall Street Journal) that includes this piece of information in the time-line of the housing bubble.

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