Tuesday, September 08, 2009

Lessons Learned and Forgotten On Housing

Whatever faults the Republican Party has had, the basic problem has been that many Republican politicians forgot what they were supposed to stand for once they gained office.

The program of the Democratic Party, however, is entirely based on lies and deceptions. Most of the time they are afraid to let voters know what they really stand for. Right now they are trying hard to pass a "public option" disguised as something else so voters won't realize what they are doing.

It is against this backdrop that concerned Americans not forget the origins of the housing and financial crisis that brought us the pain of a deep recession and the winning of the White House by a group of unabashed radicals.

Do not let them succeed in blaming President Bush and the Republicans for a crisis brought on by the likes of Carter, Clinton, Barney Frank and Chris Dodd. Do not let them succeed in burying the role of liberal legislation and regulations that forced banks to lend to deadbeats, which was the underlying cause of the crisis.

Blaming George Bush and the Republicans, as the left has done with some success, is like blaming the police for crime.

The 2008/09 Housing Crisis and lessons learned forgotten

August 06, 2009 American Thinker (Excerpt)

Most of the energy of political work is devoted to correcting the effects of mismanagement of government. - Milton Friedman

“In late 2009, our economy was dramatically impeded by the paired conundrums of a full fledged financial crisis brought about partially by a housing crisis. This pairing is referred to as a "black swan" by some in the financial community because of the extreme unlikelihood and unpredictability of two crisis meeting at the same time.

If fact, it might have been easier to predict the downturn than the followers of "black swan" theory would allow. Mean regression theory states (loosely) that if an occurrence or observation of a variable is measured at an extreme (or trends away) from the mean (or average) the next observation will tend to be closer to the mean.

Armed with "Mean Regression Theory" let us critically evaluate the history of government intervention into the free market -- in particular the housing market -- that enjoyed all around support; "The Community Reinvestment Act of 1977." The "Community Reinvestment Act" mandated that all F.D.I.C. insured banks give more loans to lower income households (or less credit worthy borrowers). The act was significantly broadened by Clinton in 1993 .

In his memoir "My Life," Bill Clinton states;

"One of the most effective things we did was to reform the regulations governing financial institutions under the 1977 Community Reinvestment act. The law required federally insured lenders to make an extra effort to give loans to low and modest income borrowers.... After the changes we made between 1993-2000, banks would offer more than $800 billion in (loans) to borrowers covered by the law. A staggering figure that amounted to well over 90% of all loans made in the 23 years of (the act)."

Before the Community Investment Act was amended in 1993, the rate of home ownership was always near 64%.

You might argue that it was this amendment that caused the significant increase in demand that artificially drove up the value of homes, nudging us towards the current housing crisis.

The simple laws of supply and demand tell us that if there are more buyers in the market place competing for the same number of houses than the home prices will increase. This is exactly what happened.

In this chart, the mean is the inflation rate. Under normal market conditions, home prices rise in step with inflation because a house is a merely a composition of lumber and other raw materials and because the inflation rate takes housing costs into consideration. Notice that the deviation from the inflation rate starts about the time of the original act and takes off after President Clinton spurs the act forward.

In the above graphs we can note a significant "progression" or deviation from the mean. It would have been logical to assume that at some point these increases would reverse, or regress to the mean.

While there are many variables that led to the economic crisis that we are still mired in, had the government not acted to artificially increase housing demand through the Community Reinvestment Act, the crisis would not have been nearly as deep.

In all things, and especially government intervention into the free market, we must remember the law of unintended consequences. There can be no doubt that the "Cash for Clunkers" program is artificially increasing demand, which will in turn cause the auto manufactures to increase output. Certainly these manufacturers are not good at predicting consumer demand (as we've seen this year) and will stall. As before, the government will ignore the lessons of the past and plant the seeds for another future crisis." American Thinker


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