In his Wall Stree Journal article, Three Decades of Subsidized Risk, Charles Gasparino discusses the indispensible role our government played in the creation of the tower of unrepayable debt whose unvelling caused the financial collapse of September 2008.
Those of us who remember the asset bubbles, and resulting financial disasters, of the 80s and 90s also remember the government bailouts of first the S&Ls and then of a major hedge fund, Long Term Capital Management. Our perception was that an immense moral hazard had been created thereby. Simply put, our government made it clear at that time that it would never fail to backstop any risk with taxpayers funds, no matter what the amount, and when all meaningful controls were removed with the repeal of Glass-Steagal, it was only a matter of time before the combination of extremely easy money borrowed at ridiculously low interest from the government, in combination with implied government guarantees of bailouts and the removal of all reasonable controls to blow up the biggest bubble of debt ever to exist.
However, the government role in creating debt and inflating asset values began long before. The Roosevelt administration's "solution" for rapidly-deflating asset values in the aftermath of the 1929 and 1933 crashes was to create a network of government agencies whose purpose was to guarantee home loans that otherwise would be unworkable, by the creation of the FHA and the GSEs such as Freddie Mac, Fannie Mae, and Ginnie Mae. Before the creation of these agencies, and in the decades prior to the Great Depression, down payments of 50% were often required, and no more than a third of the homes in the U.S. were mortgaged.
Since the 1930s, government-backed home lending, the mortgage-interest tax deduction, and numerous other federally and locally subsidized incentives for home ownership have generated enormous over-investment in housing, just as other massive federal programs have provided massive incentives for the development of suburban sprawl and universal auto ownership, and ultimately the emptying of our cities into suburbs, and the depopulation of the fertile, moist Midwestern states in favor of desert states that would never support their current swollen populations were it not for massive imputs of tax funds drawn from older, established cities in conjunction with federal agencies with almost unlimited power to allocate those funds into the pharoanic infrastructure projects we will be most unlikely to be able to maintain in the capital-and-energy deprived years before us.
A rollback and eventual termination of government-sponsored lending and housing "affordability" programs , and most of all a steep reduction in the government's role in directing our economy, would likely result not only in a sounder financial system, with lending based on the borrower's ability to pay, but would also give us more truly affordable houses. Without these incentives and guarantees, it is likely that housing prices would fall much further and that it might once again be rewarding to be a landlord.