Thomas Sowell, prolific public intellectual and the Rose and Milton Friedman Senior Fellow at the Hoover Institution, is one of America's greatest economic thinkers and educators. He's taught the fundamentals through such books as Economic Facts and Fallacies and Basic Economics and chronicled economic history through such scholarly works as Marxism: Philosophy and Economics and On Classical Economics. In his classic work Knowledge and Decisions, he espoused a sophisticated, largely Hayekian approach, revealing how the efficient spread of relevant knowledge is shaped by our social institutions, and often warped and misshapen by government.
Now, in The Housing Boom and Bust (Basic Books), Sowell contemplates the greatest expansion of government power in a generation, which was itself occasioned by the greatest economic crisis in as long. A quick but thorough guide to the causes of the crises, Sowell's book shows how government policies led to a huge increase in highly risky housing loans. As he notes, the immense local variability in housing prices and failed loans reveals that the government mistook a set of local problems for a national one, and then imposed a single troublesome national solution. Sowell argues that while foolish decisions to indulge in complicated investment vehicles affected the specifics of how the financial contagion spread, at its root the housing problem is one of bad mortgages. And those came from bad decisions by government and by borrowers themselves.
Senior Editor Brian Doherty interviewed Sowell earlier this week about the book, the crisis, and the government’s unfortunate response.
reason: Is the economic downturn caused by the housing boom and bust the worst economic circumstance of your lifetime?
Thomas Sowell: Since I was born in 1930 the economic crisis with the most impact of my lifetime was the Great Depression. As to whether this will match that, it’s too early to tell. Right now it certainly is nothing comparable to the Great Depression, but the Great Depression began as nothing comparable to the Great Depression. For the first 12 months after the stock market crash [of 1929], unemployment never reached double digits but the solution turned out to create more disasters than the problem they were trying to solve.
Whether that will happen again depends on how far and how long the current administration will push policies to solve the present crisis and what their repercussions will be. As mentioned in the book, parallel to the 1929 crash was the stock market crash of 1987. That had the potential to create another Great Depression had Reagan followed similar policies as Hoover and FDR did. He didn’t, so we just about forgot about the stock market crash of ’87.
reason: Do you see or anticipate Obama’s reactions being sufficient to turn this downturn into another lengthy depression?
Sowell: I hope not, but what we’ve seen in these past few months is an exercise in unprecedented powers. I mean, to fire the chairman of General Motors, to tell credit card companies how they should run their business, tell GM what kind of cars it should be making, and there’s no sign of an end in sight yet. Obama’s policies are a work in progress. So a lot depends on how far he will push, but I see no signs of him turning back. I see no substantial resistance in Congress. But you never know, as things start to unfold voices of sanity may prevail.
reason: What is the most dangerous sign you’ve seen so far in terms of policy reaction to the housing bust?
Sowell: The presumption that Obama knows how all these industries ought to be operating better than people who have spent lives in those industries, and a general cockiness going back till before he was president, and the fact that he has no experience whatever in managing anything. Only someone who has never had the responsibility for managing anything could believe he could manage just about everything.
reason: You parcel out some share of responsibility for the specific way the housing bust broke down to borrowers, lenders, financial markets, and the government. What was the borrowers' share?
Sowell: There are those who borrowed to buy a place to live and speculators who borrowed to speculate, and did enormously well for a number of years. Then there were people who simply don’t understand complex mortgages, particularly people who never owned a home before and whose educations were limited. But the people I would blame the most in the sense that without their interference other problems would have been within manageable means are the politicians—people in Congress and the president and regulators—who pushed the lenders and the banks and Fannie Mae and Freddie Mac into lending and buying mortgages based on people who didn’t meet standards that evolved in the marketplace and which had worked. Those politicians, in addition to that initial mistake, ignored all sorts of warnings from all sorts of sources. As I list in the book, the Economist in London, Fortune, Barron’s, people at the American Enterprise Institute, all over the map, saw that this policy of encouraging homeownership at all costs was leading to trouble.
But the politicians clearly had as their political goal homeownership as “a good thing” and persisted—and for that matter persist to this moment in pushing it. The Federal Housing Administration last I checked was promoting supporting mortgages that have less than 4 percent down payment. We all make mistakes, but politicians have persisted in their mistakes, and in the pointing of fingers in other directions.
“Affordable housing” covers a number of things. There was this sense in Washington that the cost of buying a house had become a nationwide major problem which would require a federal answer as opposed to a local answer. All the data say that was not true. People weren’t paying a higher percent of their income nationwide for housing than they had a decade earlier. In fact, it was a somewhat lower percentage in some areas. Now in some areas, including California—coastal California—people were paying half their family income to put a roof over their head. That in turn was a result of local political people putting all sorts of restrictions on building.