The Housing Boom and Bust Hardcover – 2009

This superb analysis of the causes of the current financial crisis should be required reading for every American who considers himself well informed. In a straightforward style, economist Sowell lays out step by step how we find ourselves in today's economic collapse including, governmental restrictive land use policies which led to skyrocketing prices for houses in certain select areas of the country, political pressure on banks to lend to those who could not normally qualify for mortgages, the press for 'creative' financing in order to ensure a policy of affordable housing for all, real estate speculation, 'creative' accounting practices and the failure of credit rating agencies to assess the risk of subprime backed securities.

The frightening part is that those in government who put the practices into place that led to the economy collapsing like a house of cards are still in power and running things in Congress, and the new administration sees the crisis as an excuse to implement policies that will have far reaching effects on the future of this country.

If there is one flaw in the book I would have liked Sowell to go into detail about the use of subprime backed securities that caused toxic assests to infiltrate every aspect of our economy and the economy of the world.

As always, Thomas Sowell explains the housing crisis clearly and understandably. If not for the government pressure on lenders, the housing crisis would never have occurred. What government actions caused the housing crisis?

1) Zoning and other restrictions on land use that caused severe land shortages and upward-spiraling home prices.

2) Government pressure on lenders to give housing loans to borrowers without adequate down-payments (NINJA loans = No Income, No Job, No Assets)in the name of "affordable housing" used by some politicians to buy the votes of the poor and of the "bleeding hearts."

3) Why would banks make bad loans, on which they would lose money? Because government gave them a place to dump toxic loans - namely the "government-sponsored-entities" (GSE's) named Fannie Mae and Freddie Mac, which ended up with half of all the subprime loans in the USA, and which ended up hugely bankrupt and bailed out by billions of taxpayer dollars.

There is much more in the book, but this gives just a little flavor of how government caused the housing crisis, and how taxpayers got stuck with paying for it. If you really want to understand what happened, and why, this book will explain it clearly and understandably, step by step, in plain and simple language.

Well Narrated and excellent, timely, instructive material. Gives very good insight into what really happened in 2008 and the ongoing aftermath.

As always, Thomas Sowell is on point in explaining complex situations and grasping key relations of causation and understanding how the world and the economy works. Always truthful and clear. Thanks professor Sowell, you are a light in a world of confusion and darkness.

Sowell's account of the 2008-2009 housing bubble burst is very interesting. The situation that occurred in our financial systems was very complex, The writer explains the actors and their deeds in a manner that is easy to comprehend, and maybe even a little frightening. Sowell touches on some of the history that brought us to the situation, and shows how it was all a flimsy 'house of cards.' He shows how greed drop people to do foolish things, then how fear drove the rest of the world into an economic downward spiral.

This book is well written. It's doesn't overwhelm with detail, yet delivers just enough to keep the listener engaged. Thanks Tom!

[...]

The brilliant Thomas Sowell has jumped in the fray of dissecting the 2008 economic collapse. His book is particularly focused on the housing market, an area of economics he understands as well as anyone. I very much doubt that my series of book reviews will cover too many more books that I enjoyed as much as this one. This is a valuable, readable, concise, and delightful work.

The advantage in reading Thomas Sowell about the housing bubble's collapse, or any other economic phenomena that Sowell analyzes, is that you get supply and demand principles stamped across your forehead repeatedly. You can not escape it, because he will not let you. Sowell understands the laws of supply and demand as well as any economist the world has ever seen, and he therefore understands the catastrophic effects that distortions in supply and demand cause. He has no interest in seeing basic economic laws trumped by opportunistic politicians playing Russian roulette with people's lives and well-being for the sake of a poorly constructed social or political agenda. Sowell does not initiate the book analyzing monetary policy, bank underwriting, Wall Street leverage, or any of the usual cast of characters. He goes after the land-use requirements and extraordinary building restrictions that created artificially low supply in the market, and did so in certain communities on a massive scale. Admittedly, one of the most eggregious offenders of this unintended consequence interventionism was the Bay area of California where Sowell resides, so his perspective is probably dramatized. But Sowell cogently and patiently takes to task the bureaucrats who gave way to the phenomena of inadequate supply via restrictions on growth and building density.

By Chapter 2 he has really taken off the gloves, and it becomes time for this intellectual superior (which he surely is) to give a little vocabulary lesson to a media-saturated culture that has taken too much at face value for too long. Sowell goes after the worthless expression, "predatory lending", pointing out that "the only common denominator in this accusation is that the critics don't like them.". He hits his stride in questioning the use of the expression "affordable housing" by the political elite. Individuals know what they can afford within their incomes, says Sowell. The need was not for "affordable" housing, for one man could "afford" rent on an apartment, and another could "afford" a mansion, and everything in-between. Sadly, what we mean by the expression is that "individuals choose their housing, and then the government somehow makes it financially possible for them to have it." So if government manipulation is helpful in creating "affordable housing", why have monthly housing expenses as a percentage of income done nothing but go up as long as the government has been pursuing a policy of greater "affordability"? Is this an unfair question? Sowell filets the notion that the government could create more affordable housing if they wanted to.

A great deal of time has been spent critiquing the Community Reinvestment Act of 1977, and demonstrating its complicity in the housing crisis we now suffer. What Sowell does, though, is not just blame the Act for the unwise practice of trying to use economic policy to effect a social outcome; he points out the sheer waste that such an Act is to begin with. The Act exhorts "financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with the safe and sound operation of such institutions.". Why in the world does a business need an act of Congress to pursue a profit motive, and why does it need Congress to tell it to whom it should lend money? Are politicians more qualified to influence these sorts of decisions than stakeholders? If a borrower is deemed to be a worthy recipient of credit, and the bank prices their own desired cost of funds into the arrangement based on their risk/reward analysis, is this Act even necessary? And on the other side of the equation, if a borrower is not deemed to be worthy, can any sane person argue that it is good for government mandate to encourage the business to lend to him anyways? This is patently absurd. Financial institutions may not be perfect in determining which borrowers are going to be creditworthy, and which are not going to be, but the profit motive they work for makes them inherently more qualified to judge such a thing than the social and political agenda driving elected officials.

Sowell's final chapter is hard-hitting and climactic. "No doubt perfect government regulation could have solved the housing market problems, but a perfect operation of the free market could have solved them as well.". But of course! And this is what I adore about Sowell - his ability to turn an argument around on his opponent so graciously, and yet so powerfully. We all accept that imperfect capitalism can create imperfect results at time, but to contrast imperfect capitalism with perfect regulationism is ridiculous. Yet, it is exactly what the modern day argument has to do to sell the public on the idea that the animal spirits of the free market led us into this disaster, whereas the noble and efficient fist of the government can keep us out of the next disaster. Who believes that regulatory efforts will be perfect? On what basis do we believe that an increase in regulation and re-drafting of governmental jurisdictions will be effective? Is it on the basis of their success in maintaining a strong dollar? Is it on the basis of their track record of weeding out Bernie Madoff and others? Since when do we replace a C student with an F student and call it progress?

Society needs a paradigm shift in how they think about these affairs, or we are going to re-live them. I believe that with every ounce of breath in my body. We have got to quit looking at the government as "the public interest personified". The track record here is abysmal, and Sowell stoically closes his book with an analysis on how the current crisis is being manipulated to increase government activity and jurisdiction. Ironically, the government pursuit of a solution for a problem we absolutely did not have (affordable housing) has led to a real-life problem that few can deny its impact and scope (the financial collapse). I commend Sowell's analogy of the current situation to the Depression era paradigm shift in the relationship of the state to its citizens. I implore readers to look at Sowell's argument, look at the testimony of history, and decide for themselves: Is the present environment more likely to fix what has been wrong, or to create a whole set of new wrongs? Sowell's book is a great first step in fighting the tragic conclusion that is the obvious answer to that question.