Home > Housing Recession, Recession > The Origin of the U.S. Housing Collapse

The Origin of the U.S. Housing Collapse

The most recent U.S. recession that began in December 2007 was a unique one in that it originated in the housing sector of the U.S. economy. The narrative emanating from U.S. politicians is that this recession was caused by financial market participants (Wall Street firms and banks) motivated by greed and/or incompetence. However, experience teaches that one should be skeptical of statements by politicians since they may have an incentive to distort the record to avoid accountability for the economic problems that they cause. Two books have been written providing an account of the origins of the housing market-led recession and both clearly implicate the U.S. government as being the originator of this recession. Thomas Sowell has written a book detailing the federal government’s role in this recession but the most damaging account of the government’s role is the book by Gretchen Morgenson and Joshua Rosner.  This book provides a very detailed account of the risk put into the banking system by politicians using Fannie Mae as a source of campaign contributions while claiming that their actions were motivated by the desire to raise home ownership rates in the U.S. This is a book well worth reading for an unbiased account of the actions of various politicians (and yes the book names names). The book details what Congressman Paul Ryan has described as “crony capitalism” involving politicians and firms in the private sector. Specifically, politicians could claim that people at the lower end of the income distribution were being helped by the government to achieve home ownership while Fannie executives funneled campaign contributions to the politicians and enriched themselves while purchasing loans made to these targeted individuals.

Finally, if you are wondering how it is that mortgage lending standards declined, endangering the U.S. banking system, look no further than an article that appeared some time ago in the Wall Street Journal.  As made clear in the article, lending standards declined at the behest of the U.S. government so that mortgages could be obtained by individuals at the lower end of the income distribution.

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Economics One

A blog by John B. Taylor

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