Would We Have Been Better or Worse Off Without Government Intervention In House?

The collapse of the housing market provides us with a problem we can pose to people to see how they view government and free markets.

 

Government policies notably beginning with the 1979 Community Reinvestment Act arose out of an apparent desire to increase home ownership especially among low income families. Home ownership seemed to be such a good thing, why not use government to drive up home ownership? So Congress increasingly pushed huge amounts of capital into the housing markets through low income buyer quota's imposed on Fannie Mae and Freddie Mac along with reductions in loan requirements and the securitization of mortgage packages. Then to this escalation of loan availability, expansionary monetary policy by the Feds started in 2001. The 1997 Taxpayer Relief Act for the first time let people avoid capital gains on home price appreciation without having to rollover the gains into a bigger house also pushed capital into the housing market.

 

In a predictable response in the market, the demand for real estate continually pushed up home prices giving home owners a false psychology of an apparent source of equity to support their increased spending. Regulators who should have understood more deeply than the market participants failed to fully grasp what was happening, and those few that did were ignored as the government continued to push home ownership.

 

So in analyzing the problem, we could either blame unscrupulous lenders who took advantage of the policies or the increased lending to risky borrowers pushed by Congress and the Administration. Was the huge inflow of capitol into the house market a reaction to government policies as lenders did try to lend more to low income borrowers or was it a case of market failure cause by greed and the attempt to make higher rates of return from real estate portfolios?

 

Liberals may see the housing bubble as market failure and indicative of the need for more regulation whereas free market types may see the bubble as a huge distortion of the housing market created by government artificially diverting huge flows of capital into housing. On the one hand, liberals see it as obvious that markets don't work unless carefully supervised by government whereas on the other hand free market types think it difficult to see how the market could be expected to operate any differently other than to respond to easy money policies by increased investments followed naturally by a correction. Small changes in the flow of capital occur all the time but with housing, a much larger bubble made the market response an equally large correction. So the question is, was more government involvement in the house market then and now the problem or the solution? The housing situation poses an interesting problem for advocates of government intervention to explain. It is interesting to listen to liberals address the question of whether the greater good was achieved by government intervention in the mortgage market or whether they believe evil, greedy, and unregulated capitalists caused the problem.