Thomas Sowell’s View of the Housing Bubble

As is typical of Thomas Sowell, his argument concerning the role of the collapse of the housing bubble in the Great Recession is blatantly and intentionally one-sided. According to Sowell, the federal government basically forced banks to give loans to unqualified buyers who then went into a financial nose dive and defaulted on their mortgages. He does correctly, at least in part, pin-point actions of the federal government that caused a rise in risky mortgages. But if people defaulting on their mortgages was the only problem the national economy faced, collapse of those risky mortgages alone would never have caused the Great Recession of 2007-2009.

Contrary to what Sowell writes, the causes of the Great Recession were very complex and required the cooperation of Democrats and Republicans in Congress and Presidents Clinton and Bush. Without getting into mind-numbing detail, basically what happened was the 1999 Congress repealed the 1933 Glass–Steagall Act, which regulated the way banks operated (what it did was prevent banks from gambling with their clients and their own funds). The 1999 bill that paved the way for the Great Recession was sponsored by Senator Phil Gramm (R-Texas) and in the U.S. House of Representatives by Jim Leach (R-Iowa). The third lawmaker associated with the bill was Rep. Thomas J. Bliley, Jr. (R-Virginia), Chairman of the House Commerce Committee from 1995 to 2001. During debate in the House of Representatives, Rep. John Dingell (D-Michigan) argued that the bill would result in banks becoming "too big to fail." Dingell further argued that, if passed, the bill would necessarily result in a bailout by the Federal Government. But Dingell’s voice was in the minority and the bill was passed into law in 1999 as the Gramm–Leach–Bliley Act.

At nearly the same time, the federal government deregulated financial instruments/agreements called mortgage-backed securities (MBSs), credit-default swaps (CDSs), and collateralized debt obligations (CDOs). Specifically, in 1999, Congress passed legislation prohibiting the Commodity Futures Trading Commission (CFTC), the federal agency that oversees the futures and commodity options markets, from regulating financial derivatives — MBSs, CDSs, and CDOs. That deregulation, coupled with the result of the Gramm–Leach–Bliley Act, allowed financial institutions to gamble big time by bundling housing mortgages and selling them as secure financial instruments to investors around the world. That deregulation was vigorously supported by Alan Greenspan, Chairman of the Federal Reserve, and by two U.S. Treasury Secretaries, Robert Rubin and Lawrence Summers. The head of the CFTC, Brooksley Born, resigned in protest, stating publically that deregulating exchange-traded financial derivatives dramatically increased risk to the national economy.

Shortly after that, the Federal Reserve, pushed by Alan Greenspan, kept interest rates very low, increasing the home buying trend by encouraging thousands of marginally qualified buyers to jump into the market. Add to that the federal government’s move to get more minorities in the housing market (Sowell’s argument) by loosening mortgage restrictions.

So, what most main-stream economists think happened is that banks desperately wanted to rapidly expand their services and profits and lobbied hard for massive federal deregulation. The Congress and the President(s) were happy to oblige and passed legislation that opened the door to the practices that brought about the Great Recession.

Certainly, Sowell’s one-sided idea (the federal government did it) is largely supported by conservative organizations, like the Wall Street Journal and the National Review, but are rejected by most main-stream economists. Nearly every open-minded person who has examined what led up to the Great Recession sees multiple precipitating causes, including massive federal deregulation of banks that led to an unsupervised market, Alan Greenspan’s keeping interest rates way too low in 2002-2005, federal loosening of mortgage restrictions, and the housing bubble.

Note that my brief description above doesn’t go into what happened in Congress during W’s first few years in office when additional financial deregulation laws were passed.

I must conclude with a personal observation. Real life is seldom as simple or straightforward as hardline ideologues, conservatives or liberals, want it to be.