It's is a difficult question to answer—but not because there is a shortage of reasons. Instead, all the causes are interconnected——just as all the players in the game, from the top of society to the bottom, egged each other on.
The housing disaster is not an isolated incident. Instead, it is intimately interwoven with most of the destructive trends in our society: non-traditional mass immigration, growing economic inequality, multiculturalism, globalization, and the decline of community and traditional standards of behavior.
The economic logic of the Bush Decade turned out to be wholly circular and thus is now collapsing in on itself.
Yet that makes it difficult for the analyst to find a starting point.
"My name is Yon Yonson / I live in Wisconsin / I work in a lumber mill there / The people I meet / When I walk down the street / They ask me my name and I say: / My name is Yon Yonson / I live in Wisconsin..."
Similarly, in trying to explain this decade's socioeconomic logic, you end up with thought processes like this:
Q. Why did we need so many illegal immigrants?
A. To build all those McMansions out in the distant exurbs.
Q. Yes, but why did so many Americans want to move to the exurbs?
A. To escape all the illegal aliens flooding their neighborhoods and schools.
Q. Okay, so then why did we need so many illegal aliens?
A. To build all those McMansions out in the distant exurbs.
Everything just spins around and around, like those chrome wheel rims, those insanely expensive hubcaps that were the signature useless extravagance of this decade. Neely Tucker wrote in the Washington Post in 2005:
"Today rims are a $3.1 billion industry that stands at the revolving heart of two American obsessions: automobiles and finding ever more expensive ways to buy things you already have and don't need."
Some economist should calculate what proportion of all the money spent on blinged-out rims came out of home equity loans taken out on houses bubbling up in nominal value.
Similarly, it's hard for most people to grasp the interrelatedness of multiculturalism and greed in fostering the housing bubble. "Diversity" gave the big guys an excuse for doing what they had always wanted to do: debauch credit standards and take the money and run, leaving the mess to be cleaned up by taxpayers (through direct bailouts) and savers (through Fed-created inflation eating away their capital).
To find a starting place in understanding how America's interested elites conspired across lines of race, party, and class to defraud savers and taxpayers, let's just pick one name in the news: Richard F. Syron, the CEO of Freddie Mac, a "Government Sponsored Enterprise" that guarantees almost $2 trillion in mortgages.
Freddie Mac and its "rival" Fannie Mae are able to borrow at lower interest rates than other publicly-traded private firms because it has always been hinted that, if they messed up, the U.S. taxpayers would bail them out on the grounds that they were "too big to fail."
The privilege of borrowing at below market interest rates while lending at market interest rates is a license to print money (until the inevitable catastrophe, of course). In return for this license, naturally, politicians ask Freddie and Fannie to pay off their supporters with loans they couldn't get on their merits.
Because Congress controls the Fannie and Freddie, the GSEs in turn have long controlled Congress, easily fending off the handful of politicians prudent enough to point out that they were on the treadmill to destruction. Fannie and Freddie spend a fortune on lobbying, as well as on foundations that hand out grants, typically to charities and pressure groups with ties to the Left.
Freddie Mac is one of those fortunate kind of entities where the taxpayers are "implicitly" on the hook for losses, but the bosses get paid like private moguls rather than like civil servants. (Heads I win, tails you lose.) Mr. Syron, the former president of the Boston Federal Reserve bank, has pocketed $38 million since taking over Freddie Mac a half decade ago.
Last Monday, August 6, 2008, Charles Duhigg of the New York Times reported At Freddie Mac, Chief Discarded Warning Signs:
"The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others. That chief executive, Richard F. Syron, in 2004 received a memo from Freddie Mac's chief risk officer warning him that the firm was financing questionable loans that threatened its financial health."
Later last week, Freddie Mac announced a quarterly loss of $821 million—triple Wall Street's expectation. (The next day, Freddie's larger "rival" Fannie Mae announced a $2.3 billion quarterly loss.)
Syron struck back against his critics in the pages of the Boston Globe, saying he was just following orders:
"Syron yesterday defended his loan decisions, arguing that Freddie needed to take additional risk to meet its government mandate to provide affordable housing. Although a private company, Freddie Mac was created by Congress to expand mortgage credit and home ownership. 'If you're going to take aid to low-income families seriously, then you're going to make riskier loans,' Syron said in an interview yesterday. 'We have goals to meet.' " [Syron's side of the story, By Robert Gavin, August 6, 2008]
Indeed, the quotas for Freddie's mortgages reserved for "underserved areas," (which are officially defined as "low-income census tracts or in low- or middle-income census tracts with high minority populations"), have been raised from 21 percent during the Clinton Administration to 39 percent during the Bush Administration.
Syron prides himself that he was more dedicated to "affordable housing" than to prudence with the taxpayers' money. When he arrived in 2003, Syron put an end to Freddie's habit of cooking the books in order to be more cautious than Congress wanted:
"In addition, Freddie's commitment to affordable housing had declined to the point it employed gimmicks to meet congressional goals. For example, said Syron, Freddie would essentially rent loans to meet affordable housing goals, buying them from lenders to carry on the books at year end, then selling them back. Syron ended that practice and re-emphasized the housing mission."
What could possibly go wrong with lending money to people who wouldn't qualify for credit without the government leaning on the lenders? I mean, besides all the trillions in stimulation making "affordable housing" unaffordable without trick mortgages concocted around the assumption that home prices can only go up?
But don't blame Syron for the bubble!
"Syron added the cause of Freddie's problems isn't those loans, but a deep and extended housing downturn, spreading into the broad mortgage market. US home prices are falling for the first time since the Great Depression, and the economy is weakening, affecting even creditworthy borrowers."
Right … of course, housing prices wouldn't be falling so fast now, especially in the "affordable" tier, if the whole house of cards hadn't been built up so wildly on Syron's watch.
"But to meet affordable housing goals, Freddie had to engage in activities that helped push house prices higher, and thus more unaffordable? And the more their numbers indicated that Freddie was dedicated to affordable housing, the more housing was allowed to balloon artificially?
"Am I way off the mark or is this as crazy as it sounds? .... Gives you something to tell the people you are doing for their benefit, while achieving the exact opposite."
Why was Syron chosen to be CEO of Freddie Mac, anyway? Well, one reason was that he was a hero to the Great and the Good in the early 1990s for unmasking a terrible societal scourge: lending discrimination.
The Globe's Gavin credulously recounts:
"Syron encouraged the Boston Fed's research department to wade into important, but contentious public policy issues. Perhaps best known was its study of lending discrimination, [Mortgage lending in Boston: Interpreting HMDA data (Working Paper 92-7|PDF)] which found race, not lending risks, driving loan decisions."
This study was hugely popular and influential with all the right people:
Unfortunately, it was based on economic illiteracy. As Gary Becker's Ph.D. thesis (based on a suggestion by his adviser, Milton Friedman) pointed out, if firms were irrationally discriminating against minorities, it would be profitable for nondiscriminators to enter the market and cash in.
In reality, as Peter Brimelow and Leslie Spencer wrote in Forbes on January 4, 1993, whites and minorities had the same default rate back then—demonstrating that
"[t]he market, in short, worked. The mortgage lenders somehow weeded out the extra credit risks among minorities, down to the, point where white and minority defaults were at an equal, apparently acceptable, rate."
Today, of course, minorities have higher default rates than whites—due in large part to the quotas whose justification traces back to the stupid study Syron sponsored.
Now, even Syron has noticed what he hath wrought, saying, according to a March 12, 2008 Bloomberg News article entitled Rules Let Too Many Poor People Buy Houses, Syron Says:
"It's 'perverse' that Freddie Mac and Fannie Mae, the two biggest providers of money for U.S. home loans, have been encouraged 'to put people into homes that they end up losing."
Syron, however, is apparently in no danger of losing his $38 million compensation.
Funny how that works.