Did Uncle Sam Cause the Housing Bubble?

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Matt Steinglass is arguing with his “Hayek-inflected” colleague W.W. about the origins and causes of the housing bubble. Roughly speaking, the two sides take the following positions:

(a) Federal government policies played a strong role in promoting the housing bubble.

(b) No, it was primarily the excesses of the private sector that powered the housing bubble.

Just to be clear: by position (a) I don’t mean the kind of childish Fox News dimwittery that blames everything on the CRA and Fannie Mae. I mean the grown-up critique that more generally blames federal encouragement of homeownership, Fed monetary policy, federal tax policy, and various kinds of federal regulation of the financial industry. What’s interesting here is that these two positions can collapse into each other pretty quickly. Let’s rephrase them like this:

(a) Government regulations encouraged the private sector to lever up and make lots of bad loans in the housing sector.

(b) The financial industry used its enormous influence to lobby for deregulatory legislation, which allowed the private sector to lever up and make lots of bad loans in the housing sector.

Both of these statements are more or less accurate. And of course, deregulation is merely shorthand for a different set of regulations and policies, so our two positions can collapse even further if we like:

(a) Changes in government policy encouraged home buyers to borrow too much and encouraged the financial industry to lever up and make too many bad loans.

(b) Changes in government policy encouraged home buyers to borrow too much and encouraged the financial industry to lever up and make too many bad loans.

The difference here becomes more one of inflection than anything else. If the federal government created policies that allowed the financial sector to behave recklessly, whose fault was this? The government qua government? Or was it a specific and remediable failure of government caused by its capture by the financial industry? There’s a sense in which it doesn’t matter: government policy is government policy, and if federal regulations were too lax, that means the government was at fault.

But in another sense, it makes all the difference in the world. If we use government in its traditional civics class sense, where policy changes are driven by politicians of different parties responding to different swathes of public opinion, that leads us to one set of possible fixes. But if we use government in the sense of a political institution that primarily responds to lobbying by the rich and powerful — which is my preferred sense — that leads us to quite a different set of possible fixes. In both cases, it’s quite accurate to say that “the government” played a big role in the problem, but they could hardly be more different in the kinds of solutions they suggest. The problem, then, is that when someone says this you have to listen more to the accent in which they talk than to the words themselves, and that can be pretty tricky. Caveat emptor.

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