Paul Krugman has a column in today's New York Times blaming Reagan-era legislative changes for creating the current economic crisis:
Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending — restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down. These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded. Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped.
If Reagan made it easier for families to buy homes, you might have expected home-ownership rates to have climbed during his administration. Not so. Here's a Clinton-Gore press release from October 23. 1997 that tells the story:
Highest Homeownership Rate in American History. In the third quarter of 1997, the homeownership rate climbed to 66.0 percent from 65.7 percent in the second quarter. The homeownership rate is now at its highest level ever. The previous record high was 65.8 percent in the third quarter of 1980.
Largest Increase in Homeownership on Record. After falling from 65.6 percent in the first quarter of 1981 to 63.7 percent in the first quarter of 1993, homeownership is on the rise again. Since the first quarter of 1993, the homeownership rate has increased from 63.7 percent to 66.0 percent today -- that's the largest 4 1/2-year rise in homeownership on record.
The Clinton press release attributed much of the gains not to down payment rules, but to mortgage rates: "Mortgage rates have averaged just 7.8% under President Clinton -- lower than under President Reagan (12.8%)." The Clinton administration also took credit for easing the rules, saying that it "has eliminated unnecessary and overly strict requirements under its loan program that made it difficult for many families to qualify for mortgage loans. It has also given lenders greater flexibility to make homeownership possible for more nontraditional borrowers."
President George W. Bush went further down the Clinton road, signing and implementing the American Dream Downpayment Act.
The way Mr. Krugman tells it, the crisis is the unfettering of the marketplace, the result of government lifting restrictions on mortgage bankers. But the crisis may just as easily attributed to government activism in subsidizing down payments and risky loans, bending the banking system to its policy goal of increasing home ownership, particularly among minorities (the Clinton release specifies gains in homeownership for blacks and Hispanics). Mr. Bush also saw home ownership in racial terms:
The rate of homeownership in America now stands a record high of 68.4 percent. Yet there is room for improvement. The rate of homeownership amongst minorities is below 50 percent. And that's not right, and this country needs to do something about it. We need to -- (applause.) We need to close the minority homeownership gap in America.
Again, the point is that when the president gets up and sets a goal of closing a "homeownership gap" in terms that consciously echo Kennedy's Cold War "missile gap," it isn't an example of "the magic of the marketplace" being "set free." It's an example of the government intervening in the housing finance market, which risks unintended consequences.