Dennis Prager talked to economist Tom Sowell, 79, on Dec. 15, 2009 about his new book “The Housing Boom and Bust”.
Dennis: “Who caused this bust?”
Tom: “Government. The people who were forced directly to make the bad loans under the Community Reinvestment Act (1977) and other legislation following it don’t constitute the majority of people who lend, that is true, but it is also true that about a decade ago, there was what was called a ‘voluntary agreement’ by those lenders not covered by the Community Reinvestment Act to in effect follow the same guidelines with the threat over them being that they would be prosecuted for discrimination if they didn’t. This prosecution…would be imposed if you were a lender who refused to lend on a house worth less than a $60,000 since low-income minorities are more likely to buy this kind of house and would be a ‘disparate impact.’”
Dennis: “Is it government bureaucrats or greedy bankers?”
Tom: “Government bureaucrats. I don’t know how anybody can measure greed. Were [bankers] less greedy during the period things were going wonderfully or did they become greedy only after things turned bad?
“There’s a history of the government, particularly the Department of Housing and Urban Development, imposing quotas on Fannie Mae and Freddie Mac, to buy up mortgages that the original lenders made to people who were low income, minorities, or other criteria. How can you say it was not the bureaucrats? That most of those who lent money during the boom were not subject to the boom, but they also had a ‘voluntary’ agreement with HUD to follow the same practices of those directly regulated.
“The government had life and death powers over lending institutions. The ordinary business decisions that companies can make in the free market, many of these companies can not make without government approval. They can hold up your approval at their discretion.”
Dennis: “In Canada, they didn’t have this bust. Canadian banks are not allowed to leverage nearly as much as American banks. Isn’t that a good regulation?”
Tom: “Yes, but it wasn’t just that, at the heart of it is the mortgage loans made to people who had a low probability of paying them back. As long as they were paying back the mortgage loans, there was no crisis. That’s one of the reasons it is hard to blame the ratings agencies for that. There was no evidence out there.
“The real problem was that no one knew how risky these new devices, the subprime loans, the no-money-down things… Those were all new. There was no reasonable way to rate them. And yet the law required them to be rated, and the law also specified that three agencies had the sole power to rate them for the purposes of SEC regulation. They had to certify these things and they gave their best guess.”
Dennis: “When did this idea that you have to make these loans to people in poor categories, when was that set?”
Tom: “The idea goes back to the Community Reinvestment Act of 1977. Like a lot of legislation, nothing was done for years until it was passed. What set off a lot of the new activity were studies suggesting that banks were discriminating against blacks and other minorities. That set off a political crusade. You got a government inquisition.”
Dennis: “You believe that banks would not have given out those loans were it not for governmental pressure?”
Tom: “Not only do I not believe it, obviously the government didn’t believe it or they wouldn’t be imposing quotas. Janet Reno would not have been threatening lending institutions with prosecution if she didn’t like their statistics.”
Dennis: “Was the Savings and Loans crisis of the 1980s caused by the deregulation?”
Tom: “It was the combination of deregulation and the government guaranteeing these organizations without putting restrictions on them, which is essentially what they’ve done with Fannie Mae and Freddie Mac. Everyone assumed, correctly, that when push came to shove, the U.S. Treasury would step in and guarantee the losses by Fannie Mae and Freddie Mac.”
Dennis: “The Right believes the housing crisis was caused by too much government intervention and the Left believes it was caused by greed. I don’t know how you abolish greed outside of religious preachers doing their job… Society can’t do it. When the government wants to abolish bad traits, we’re doomed.”
Tom: “The mortgage market for about a century was considered one of the safest markets around. That’s where the widows and orphans would put their money so they would have something to live on. This is not like commodities speculation. For all these decades, greed didn’t have a bad effect. It was only when the politicians stepped in.
“So many people warned before this happened. I did a piece in the Wall Street Journal in 2005 in which I said that these financial arrangements can collapse like a house of cards, but I was not even among the first 100 who said something like that. The politicians, Barney Frank, Chris Dodd, all dismissed the dangers.”