People think for a second. The entire sub-prime market is only 500 billion dollars. Every mortgage could go bad, and you are looking at a roughly 250 billion dollar loss. The real estate market has lost over 3 trillion in value – and we have yet to see even 50% of the sub-prime mortgages default.   If the Community Reinvestment Act was a fault, why is the housing crisis centered in the condo markets of Vegas, Phoenix, and Miami. 

I am not going to tell you that the housing crisis isn’t at the center of our problems, but I am going to say that is only a part of the larger problem which is debt, specifically consumer debt. In economic terms, investment debt is not predictable. Some investments work and others don’t. Consumer debt on the other hand is very predictable. It pushes demand forward. So when the government forced interest rates down for housing, we created demand today that really would have been normally filled in the future.

When we express future demand today, we pull revenue streams forward, thereby overstating present revenue. The builder doesn’t think that the revenue is overstated, and neither does the banker who starts lending on looser and looser terms. To them, the boom will never end. So the builder, in turn leverages his wealth, buying things from people who find themselves suddenly richer. Those people in turn leverage their wealth, and so on and so forth, until the economy is brimming with imaginary wealth.

The problem is that at some point there isn’t enough future demand to pull forward. We hit that point in 2007. Housing demand for 2007, 2008, and 2009 had been largely pulled forward into 2004, 2005, and 2006.  There was no cheaper capital to pull into the game of low interest rates. In fact, we were experience the opposite as interest rates on variable notes reset higher, forcing people to sell at the exact same time that demand was falling.   This was the housing crisis.

In the net, the problem wasn’t the marginal poor person buying a house that he couldn’t afford. The problem was the near-rich person who bought the swimming pool for the house that he couldn’t afford. It was people spending imaginary wealth, borrowed from bankers who thought that the boom would never end. Having worked in banking for 20 years, I can assure you that the government didn’t force bankers to make loans. They simply lowered interest rates below the rate of inflation and stood back, and let economic gravity take hold.

The government is almost entirely responsible for this mess, but as conservatives lets at least blame the right people, and learn the right lesson. Failing to assign the blame for economic bubbles is the reason that so many politicians try to create them.