Four HorsemenPresidential candidate Barack Obama speaks with a broad brush. He explains the current crisis with typical overgeneralization. It is, he says, the result of “eight years of failed Republican policies.”

Republicans take the opposite tack. They follow a narrow trail from the Community Reinvestment Act. It required banks to make “affordable loans” to poor credit risks. From that, the trail goes to the profit (and bonus) engine at Fannie Mae and its major contributions to leading Democrats--- who happen to include Barack Obama.

As Strother Martin famously said in one of the late Paul Newman’s best movies, “What we have here is a failure to communicate.” (“Cool Hand Luke,” 1967)

So let’s pretend we’ve moved to a more comfortable future. That’s one where we have the benefit of hindsight. It’s also one where we are no longer quaking with fear over losing our shirts, our jobs and our homes.

What story will we be telling the next generation? I believe it won’t be a tale of uniquely Republican failure. Nor will it be a narrow trail from a single piece of well-meaning legislation to a glib community activist.

Instead, it will be a dark tale of butterfly effects--- an illustration of the Law of Unintended Consequences. It will be a story about how four distinct changes led to a cascade of borrowing and a price bubble in housing, the most widely held (and most leveraged) asset in America.

Any one of these changes, by itself, would not have caused a global meltdown. But mix them together, in the “right” preconditions, and the result is our current misery. Think of them as the Four Horsemen of Our Apocalypse. Here’s the list.

  • The institutional reduction of lending standards forced by the Community Reinvestment Act.
  • The Taxpayer Relief Act of 1997, which made homeownership the best tax-free investment in America.
  • The 9/11 terrorist attack, which resulted in artificially low interest rates.
  • “Innovation” in mortgages to comply with the CRA--- innovation that also happened to be immensely profitable to everyone in the home finance food chain.


            It has been said that the road to hell is paved with good intentions. If that’s true, the Community Reinvestment Act is the equivalent of an interstate highway, even though it seemed like a good idea at the time. Both political parties have favored expanding access to homeownership for more than 40 years. Former Federal Reserve Chairman Alan Greenspan, who served under presidents of both parties, has defended taking risks to expand homeownership.

That zeal, combined with a $1 trillion lending commitment from Fannie Mae, led to the rate of homeownership rising to a record 66.8 percent of all households in 1998. The previous peak of 65.8 percent had been set nearly two decades earlier, in 1980, so it isn’t an easy number to move.

But move it did. From the 1998 record, the rate of home ownership soared to a spectacular 69.2 percent by the fourth quarter of 2004.

Should seven out of 10 households be homeowners? I doubt it. Homeownership isn’t appropriate for some people. And it is more than some can manage. That’s just the way things are.

That questionable rise, however, wasn’t enough, by itself, to take down the global economy. Like most major events, the root cause didn’t become deadly until it spread from a small group to every potential homeowner.

The seed for a broader bubble was planted in 1997. That’s when Congress passed the Taxpayer Relief Act of 1997. It made our homes the least-taxed asset in America. The law allowed any homeowning couple to realize up to $500,000 in capital gains, tax-free.

Increase the tax on something and you’ll get less of it. Decrease the tax on something and you’ll get more of it. The change set in motion a buying and building boom.

Four years later, the 9/11 terrorist attack paralyzed the economy. To avoid a recession, the Federal Reserve lowered interest rates. Suddenly, home buyers of modest means had expansive visions of marble bathrooms, granite kitchen countertops, and four-car garages. It didn’t hurt that homeownership looked like a slam-dunk compared to the results of investing in the technology bubble of the late 90s.

The last link, the epidemiological key, was the “innovation” in mortgages that spread “affordable” home loans to every American homebuyer, not just the credit challenged and disadvantaged.

Now it’s our job to dig ourselves out of the rubble. Let’s hope we don’t get too much “help” from our government.

On the web:

Earlier columns on the brewing crisis:

Working Stiff Houses. Fat Cat Prices (May 1, 2005)

A Tale of Two Transactions (December 2, 2006)

The Nitwit Sector (August 10, 2007)

Déjà vu, Texas (October 10, 2007)

The Coming National Yard Sale (December 21, 2007)

Slider Land (January 25, 2008)

End Insider Rating (March 28, 2008)

Reading the New Map (September 19, 2008)

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