If Congress really wanted to undo the financial excesses that led to the panic of 2008, it should have, rather that pass the misbegotten Dodd-Frank financial “reform” bill, simply shifted Federal housing policy away from its weird obsession on promoting home ownership. Simple. Not pushing home ownership would have meant, for instance, that Fannie and Freddie wouldn’t have lowered their underwriting standards in order to encourage more subprime mortgage lending. And the FHA wouldn’t have been handing out money to borrowers who were putting just 3% down. Rather, just get the government out of the way and let the market do its work.
That’s the conclusion, anyway, of a new report put out by a group of Washington think tanks that looks at the effect Dodd-Frank has had since its enactment six years ago. Its conclusion is not positive: Dodd-Frank has crimped the creation of credit while not doing much to fix the problems that led to the last crisis. The best way to improve the law would be to repeal it entirely.
I agree! First, the benefits of home ownership (which the government is still pushing) are way overrated. On the one hand, owning a home is a great way to build wealth over the long term, using leverage. But that leverage can be a two-edged sword. As we saw during the recession, economically stressed underwater borrowers found themselves burdened with debt and chained to their homes when they might have otherwise moved to cities with stronger labor markets. Nor is it clear that there’s much of a correlation between home ownership and per-capita wealth. On Wikipedia’s list of homeownership rates of 47 countries, the bottom five are Austria, South Korea, Germany, Hong Kong, and Switzerland. All have ownership rates below 60% (the U.S. rate is 64.8%), but the people in those countries seem to be doing pretty well.
Yet the underlying assumptions of Dodd-Frank seem to be that a) pushing home ownership is still a good idea, and b) the main cause of the 2008 panic was that the financial system was too lightly regulated and so spun out of control. As the think tanks’ report points out, both those assumptions are wrong. The report suggests three main reforms: close the GSEs, stop Fed bailouts, and shutter the Consumer Finance Protection Bureau. I’m not sure I agree with all three (although the thought of killing the CFPB in particular puts a spring in my step), but the report overall offers plenty of very worthwhile insights.
What do you think? Let me know!