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Our own more recent housing boom and bust began when local politicians in various places began severely restricting the building of houses, in the name of “open space,” “smart growth” or whatever other political slogans were in vogue.
As housing prices skyrocketed in such places as coastal California, both renters and home buyers in these particular places often had to pay half their monthly income just to put a roof over their heads. This in turn led to Washington politicians declaring a need for nationwide laws and policies to create “affordable housing,” even though people in most of the country were paying a lower share of their income for housing than in previous years.
This political crusade for “affordable housing” was at the heart of laws, regulations and even threats from the Department of Justice, against mortgage lenders who failed to lend to as many low-income and minority borrowers as the politicians wanted them to.
Regardless of the additional problems that occurred as these mortgages were bought by Fannie Mae and Freddie Mac, or were later bundled into securities sold by Wall Street, the fundamental problem was that many people simply stopped making their mortgage payments — as was perfectly predictable when lending standards were forced down by the government.
The politicians and bureaucrats who forced lenders to lower their standards had limited goals in mind — namely affordable housing and more minority home ownership. But the repercussions when the housing markets collapsed spread all across the American economy and led to financial crises overseas, where financial securities based on American mortgages were widely sold.
All politics may be local but the repercussions reach around the world, and even extend to generations yet unborn, who will be left to cope with the national debts resulting from this debacle.
Quick fixes for the economy now are unlikely to get investors to make job-creating investments, which depend on long-term factors ignored by politicians who are focused on the 2012 elections.
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