Thomas Sowell on Who's To Blame

The great economist Sowell as usual makes you think a little bit deeper about who's really to blame for our current economic mess:

When government policy is mentioned at all in handing out blame, it is usually blamed for not imposing enough regulation on the private sector. But there is still the question whether any of these explanations can stand up under scrutiny.

Take Wall Street "greed." Is there any evidence that people in Wall Street were any less interested in making money during all the decades and generations when investments in housing were among the safest investments around? If their greed did not bring on an economic disaster before, why would it bring it on now?

......But an increased demand for housing does not automatically mean higher housing prices. In places where supply is free to rise to meet demand, such as Manhattan in the 1950s or Las Vegas in the 1980s, increased demand simply led to more housing units being built, without an increase in real prices-- that is, money prices adjusted for inflation.

What led to a boom in housing prices was increased demand in places where supply was artificially restricted. Coastal California was the largest of these places where severe legal restrictions on building houses led to skyrocketing housing prices. Just between 2000 and 2005, for example, home prices more than doubled in Los Angeles and San Diego, in response to rising demand in places where supply was not allowed to rise to meet it.

.......If the housing boom was so localized, how did this become a national problem? Because the money that financed housing in areas with housing price booms was supplied by financial institutions across the country and even across the ocean.

Mortgages made in California were sold to nationwide financial institutions, including Fannie Mae and Freddie Mac, and to firms in Wall Street which bundled thousands of these mortgages into financial securities that were sold nationally and internationally. The problem was that, not only were these mortgages based on housing prices inflated by the Federal Reserve's low-interest rate policies, many of the home buyers had been granted mortgages under federal government pressures on lenders to lend to people who would not ordinarily qualify, whether because of low income, bad credit history or other factors likely to make them bigger credit risks.