During a time of economic prosperity, Presidents Clinton and Bush both sought to enable more Americans to own their own homes, a value at the core of the American Dream.
Clinton initiated programs that expanded Fannie Mae and Freddie Mac’s vast authority to print money; Bush followed Clinton's lead with programs like the American Dream Downpayment Fund and America’s Homeownership Challenge and simultaneously dismantled an unnecessary regulatory framework.
The intention was to create an environment where lower income Americans could step up from rentals to houses, middle income Americans could step up from houses to bigger houses (suburban ‘McMansions’), and the providers of capital (Wall Street), could profit from the government subsidized activity.
The federal government could subsidize trillions of dollars in debt financing, banks could sell loans to people eager to own their own homes, and Americans could enjoy the prosperity.
For a time, many, many people prospered. Most legitimately.
There were, however, voices that cautioned against the accumulation of mortgage debt and the relaxation of oversight. Some, like Robert Shiller, have been widely recognized for their foresight. Those voices that were too academic, have not been recognized by many. In looking deeper at the enormous amount of information and data that is freely available, anyone can see that there are economic papers dating back to the late 1990s that raised the alarm. But rational analysis had a limited audience when so much prosperity was being created.
Then, of course, the bubble burst. A long drunken night of consumption followed by a sobering dawn. Many people lost their homes and the dream of increased property ownership and corporate profits faded. Instead of defending their properties at any cost, Americans left their keys at the bank doorstep and ran. Corporations, 'too big to fail', turned to the government for subsidy.
Renting would have been cheaper.
On January 20, 2009 the Obama cleanup begins. US policy will move towards decreasing home ownership, houses and condos will convert to rentals, mortgages will be modified and repriced, and public subsidized programs will be rethought. A move toward a new equilibrium will begin, buoyed by the excitement of an America with sturdy bridges and freshly paved roads, free from foreign oil and fueled by the sun and the wind.
And smart Wall Street survivors, who did read those academic papers that were ignored by Clinton and Bush and who shorted mortgage debt and made billions, will buy up distressed assets and make billions more.
Change.gov Video Posted January 12, 2009
