In 2002—under the auspices of “compassionate conservatism”—President George W. Bush promoted affordable housing for all Americans, declaring:  “We can put light where there’s darkness, and hope where there’s despondency in this country.  And part of it is working together as a nation to encourage folks to own their own home.”  A year later he proudly signed the “American Dream Downpayment Act,” implementing his aspirations.

Yet thoughtful critics, both academic and congressional, warned against such policies, with Barrons magazine prophetically decrying as spurious any compassion that exposed “taxpayers to tens of billions of dollars of possible losses, luring thousands of moderate-income families into bankruptcy, and risking the destruction of entire neighborhoods. . . .   Free down payments carry catastrophic risks. . .   Transferring the risk of homeownership from buyers to taxpayers does not endow virtue in America.  Giving people a handout that leads them to financial ruin is wrecking-ball benevolence’” (p. 46).  What a memorable phrase—“wrecking-ball benevolence”!  Six years later, looking bewildered amidst the economic meltdown, a baffled Bush asked his Secretary of the Treasury, “How did we get here?”  Amazingly, Thomas Sowell notes, “neither he nor many others in politics and the media saw any connection between their housing crusades and the economic crisis now facing the nation” (p. 100).

Sowell’s The Housing Boom and Bust, rev. ed. (New York:  Basic Books, 2010) makes this connection and helps us understand the “great recession” of the past three years.  Though politicians such as Barney Frank and Barack Obama feverously blame “corporate greed” and Wall Street “fat cats” and unregulated capitalism, in truth:  “The development of lax lending standards, both by banks and by Fannie Mae and Freddie Mac standing behind the banks, came not from a lack of government regulation and oversight, but precisely as a result of government regulation and oversight, directed toward the politically popular goal of more ‘home ownership’ through ‘affordable housing,’ especially for low-income home buyers.  These lax lending standards were the foundation for a house of cards that was ready to collapse with a relatively small nudge” (p. 57).

As an economist (who has taught at prestigious universities such as UCLA) and syndicated columnist, Sowell deftly analyzes and explains what actually happened, beginning with “the economics of the housing boom.”  Housing sales skyrocketed during the first half-decade of the 21st century largely as a consequence of risky policies promoted in Washington D.C. (Fannie Mae; Freddie Mac; HUD; the Federal Reserve System) and Wall Street (banks and brokers).  Underlying it all was a “smart growth” process launched in the 1970s that radically restricted land use in some areas, notably California, under the aegis of “preserving ‘open space,’ ‘saving farmland,’ ‘protecting the environment,’ ‘historical preservation’ and other politically attractive slogans” (p. 11).  In fact, “vast amounts of land for which the local inhabitants have paid nothing are nevertheless controlled by them politically for their own benefit, to provide a buffer zone between themselves and less affluent people” (p. 131).

Consequently, one could buy the same house in Houston for a fraction of what was required in San Francisco, so “most of the country was not suffering from skyrocketing housing prices, which were largely confined to particular communities in which there were severe limitations on the building of housing” (p. 16).  Housing prices and risky loans were, consequently, concentrated in these areas.  Add to this the “creative financing” that surged in the 1990s—low (or no) down payment loans, adjustable-rate mortgages, bundling mortgages—and there were soon millions of people “buying homes that they would not be able to afford in the long run” (p. 19).

Much of this resulted from political stratagems promoted by the likes of Barney Frank and Christopher Dodd (most recently co-authors of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the massive financial regulatory mandate imposed by the Obama administration), designed to insure “affordable housing” for everyone.

The Community Reinvestment Act of 1977, hugely expanded by the Clinton Administration in the 1990s, enabled federal agencies to pressure banks and mortgage companies to finance “underserved” groups, especially low income and racial minorities.  When, under Clinton, HUD secretaries Henry Cisneros and Anthony Cuomo were given oversight of Freddie Mack and Fannie Mae—transforming staid conservative loan agencies into depositories for high-risk mortgages—new banking strategies were put in place, ripe for abuse.  And abused they were!  Community activists such as Jesse Jackson extracted millions of dollars from financial institutions fearing any accusation of racial profiling.  Crying out for “social justice,” these activists, including Saul Alinsky disciples such as Chicago’s Gale Cincotta, declared:  “‘We want it.  They’ve got it.  Let’s go get it’” (p. 117).

All told, Sowell calculates:  “Over the years, the sums of money extracted from financial and other business organizations by community activist organizations, using a variety of tactics, have amounted to more than a trillion dollars, according to the national Community Reinvestment Coalition—nearly all of this money being received since 1992” (p. 119).

Having described the phenomena, Sowell succinctly analyzes the problem by distinguishing “enabling causes from impelling causes from precipitating causes” (p. 138).  Easy credit, available on virtually every street corner, was the primary enabling cause.  Impelling the process “were growing pressures from government regulatory agencies for mortgage lenders to reduce their lending requirements,” allowing most anyone who wanted a home to acquire one (p. 139).  The primary precipitating factor was the abrupt fall in housing prices, especially impacting those speculators (“flippers”) who banked on rapid, booming home values, resulting in the tsunami of defaults, leaving us amidst the ruins of lost savings and battered IRAs.

“Few things,” Sowell laments, “blind human beings to the actual consequences of what they are doing like a heady feeling of self-righteousness during a crusade to smite the wicked and rescue the downtrodden” (p. 162).  Declaiming themselves champions of social justice, politicians and community activists polished their images in the light of a pandering press and acted “like scavengers, able to extract large sums of money from banks and other institutions by raising claims of discrimination, whose power to delay government approval of bank mergers and other business decisions made pay-offs to these activists the only prudent course for those accused” (p. 162).

Gerard Reed is a retired professor of history and philosophy, most recently Point Loma Nazarene University in San Diego. He is the author of three books--The Liberating Law; C.S. Lewis and the Bright Shadow of Holiness; C.S. Lewis Explores Vice & Virtue--as well as a variety of articles and book reviews.