Economist Stan Liebowitz says in this WSJ op-ed that “most government policies being discussed to remedy woes in the housing market are misdirected” because they are based on a misunderstanding of “the actual causes of the mortgage crisis.”
Using real (and readily available) data Liebowitz shows that most of the causes of the housing crisis being promoted by the media and the political class — subprime mortgages, so-called “liar loans,” poor creditworthiness, unemployment, upward reset of interest rates, and under regulation — are only contributory factors rather than the meat of the matter.
To avoid future problems, it is important to correctly understand the basic causes of the crisis. Implementation of all of the “suggestions being put forward by the administration and most media outlets -- more stringent regulation of subprime lenders -- would not have prevented the mortgage meltdown regardless of their merit otherwise.”
The central issue in the current foreclosure crisis is people having no skin in the game. That is, they owe more than their property is worth. Much ado has been made in some corners about people that are “upside down” on their mortgage. It turns out that this is not only a major problem; it is THE major problem. Yet none of the remedies being offered address this matter.
Liebowitz asserts that a “significant reduction in foreclosures will happen when and only when housing prices” reach true market levels “and unemployment stops rising.” He asserts that “current [home] prices are approaching their long-term, inflation-adjusted pre-bubble level,” but he warns that many of the policies aimed at helping could actually derail this natural progression and exacerbate the problem.
In his final sentence, Liebowitz cites “fictitious causes that fit political agendas and election strategies” as the basis for most of the policies presently being advanced as solutions to the housing crisis.
When dealing with political matters it is essential to understand that politics has its own economy. It is the nature of that economy for politicians to publicly hide behind a mask of altruism while responding to political incentives. Political maneuverings are chiefly designed to increase the power of the individual politician or select groups. All the better if this can be done while simultaneously promoting (or appearing to promote) an ideological agenda with which the politician or group is aligned, or while increasing the power of political allies.
Wise citizens should gain a healthy appreciation for the political economy. They must realize that it is necessary adroitly work within this system — though often unpleasant — to advance their own causes, even when those causes are just. The trick is to pull that off while remaining unsullied.