Dismantling the Business Oppressive Dodd-Frank Act

The new minority leader in the Senate, Democrat Chuck Schumer, has been chortling that he has the votes to prevent the repeal of the anti-business growth Dodd-Frank Act.  Dodd-Frank was passed by Democrats on the heels of the Great Recession as a means of deflecting criticism from the government and its policies on home mortgages to pretend that the causes of the Great Recession were entirely or mostly due to private financial institutions.  Senator Christopher Dodd and Congressman Barney Frank had been among the most vociferous advocates of the government policy of easy credit for home loans and had explicitly claimed before the financial crash that there was no looming credit risk.  President-elect Trump has pledged to repeal Dodd-Frank, which is a very good idea.

A very interesting article in the 17 November Wall St. Journal by Peter Wallison discusses both the false pretenses that were used to justify the Dodd-Frank Act and the harm done to recovery from the recession and to economic growth rates by that act.  On the matter of whether the act actually addressed the causes of the recession and a few of its consequences:

Signed into law in 2010, Dodd-Frank was based on the idea that insufficient regulation, particularly of Wall Street, had allowed a buildup of subprime mortgages, a housing bubble and, ultimately, the 2008 financial crisis. The Democrats who controlled the Congress elected in 2008 acted quickly to follow out the implications of this diagnosis by adopting Dodd-Frank, the most restrictive financial legislation since the New Deal. 

Strikingly for such important legislation, there was no significant debate in Congress about whether the cause of the crisis had been correctly identified.

A later study, in 2014 by my colleague at the American Enterprise Institute Edward Pinto, showed that by 2008 more than half of all mortgages in the U.S. were subprime or otherwise risky, and 76% of those were on the books of government agencies. This leaves no doubt that government housing policies—and not a lack of regulation—created the demand for these risky mortgages. But by then it was too late. 

It is not difficult to find connections between Dodd-Frank and the historically slow recovery from the financial crisis. Here’s a sampling. 

The Financial Stability Oversight Council, a Dodd-Frank invention, was empowered to designate large financial firms as systemically important financial institutions, or SIFIs, turning them over to the Federal Reserve for “stringent” regulation. One of the council’s earliest actions, in July 2013, designated GE Capital as a SIFI. 

GE soon recognized that its huge financial subsidiary was wilting under the Fed’s control. Seeking an exit, GE wound down GE Capital, eliminating from the market an important source of funding for small and innovative firms. 

The Volcker rule, another Dodd-Frank provision, prohibited banks and their affiliates from trading securities for their own account, although there was no evidence that this activity had any role in the financial crisis. 

Soon, trading desks all over Wall Street were closing down, and traders were complaining that the debt markets were dangerously short of liquidity. The Treasury Department, deeply tied into Dodd-Frank, said it was “studying” the issue. It still is, and spreads are still historically wide. 

Small banks, the credit sources for small businesses and startups, faced new and costly regulation, requiring them to hire compliance officers instead of lending officers. 

One regulation on mortgage lending from the Consumer Financial Protection Bureau—a Dodd-Frank agency—was over 1,000 pages long. Imagine that landing on your desk in a small bank. 

No wonder, as this newspaper recently reported, banks are no longer the nation’s principal mortgage lenders. Worse still, as reported last week, job gains at startup firms, which are major sources of new employment and technological innovation, are at their lowest level in 20 years.

I added the bold to the sentence in the quoted portion of the article.

Federal Reserve Joins Vendetta Politics of Obama Regime

Steve Forbes discusses the Federal Reserve action on its latest stress tests of the nation's 18 largest banks in his Fact & Comment in the 6 May issue of Forbes.  Of the 18 biggest banks, the Federal Reserve claimed four had serious problems which it said must be cleared up.  Ally Financial is the present name for GM's bankrupt and reorganized financial services arm.  It is in real trouble.  But Steve Forbes claims that JPMorgan Chase, Goldman Sachs, and BB&T were named as having problems purely for small-minded political reasons.

JPMorgan's Jamie Dimon has expressed displeasure with the Obama administration, but it is a well-run company with a good balance sheet.  Goldman Sachs was too close to Romney and Lloyd Blankfein also made it clear he is not happy with Obama.  So, the Federal Reserve concocted reasons to fault these two institutions.

Most troubling was the claim that the best run major bank in the entire nation had serious problems because it uses its own economic models and judges its own loan portfolio differently than the Federal Reserve wants it to.  Independent thinking is discouraged, even when a company's track record justifies it to any rational observer.  In fact, if all banks work on one model, the risks of a systemic banking failure go up.  This is especially true when the dictated model is designed by bureaucrats for their purposes, not those of the private sector.  It is even more true when the appointments to the Federal Reserve are poisoned by Obama appointees.

Steve Forbes notes that the Basel Accords required banks to have heavy reserves for loans to even the best commercial companies, but none for loans to Greece or Iceland or Ireland.  Those government accords also enshrined mortgages for special low reserve treatment.  Look where these imposed government models led the world financial institutions in 2008 and 2009.

BB&T bank CEO John Allison IV, now retired and heading the Cato Institute, opposed the TARP program and was most forcefully forced to take that money in 2008-2009.  His bank was so well run it had no need for the money.  The Federal Reserve wanted to hide the worst banks by making sound banks take the money and it was hiding potential losses on its loans by making a forced profit in interest from sound banks that did not want the money in the first place.  Allison further earned the enmity of the Federal Reserve and the Obama Regime by writing The Financial Crisis and the Free Market Cure - Why Pure Capitalism is the World Economy's Only Hope, published in 2013 by McGraw Hill.

Government thugs cannot stand the heat of criticism, especially when it is well-stated.  In the Obama Chicago style, they strike back brutally with the misuse of government power.  You do as they say, or they will breaka you knee caps.

Fanny Mae and Freddy Mac Steal Again

The gang that cannot shoot straight, has come galloping into Washington, D.C., and robbed the Treasury, the People's Bank once again.  Sheriff Obama and his hooligan crew of law enforcers carried the loot out to their horses for them and invited them to a good dinner.  They are still in town, living it up!  Why not?  In the past, Fanny Mae and Freddy Mac always provided the Democrats and Obama in particular with great campaign contributions.  The more money the sheriff lets them steal, the more money they give him to remain sheriff.

Fanny Mae has just asked for another $8.4 billion from the Treasury after First Quarter losses this year of $13.1 billion, including $1.5 billion in dividends paid to the government on its preferred stock.  The government took control of Fanny Mae, a government-sponsored corporation, in September 2008.  Fannie Mae ended the First Quarter with a net worth of -$8.4 billion dollars.  This government-run business lost $15.2 billion in the Fourth Quarter of 2009 and $23.2 billion in the First Quarter of 2009.

Just four days earlier, Freddie Mac asked for a $10.6 billion handout.  Its First Quarter loss was $8 billion.  Freddy Mac had previously received $50.7 billion in bailouts, while Fanny Mae had previously received $76.2 billion.  Fanny Mae had already been given $15.3 billion of taxpayer's money as recently as 31 March 2010.  In December 2009, the Obama administration removed a $400 billion cap on gifts to Fanny Mae and Freddy Mac and promised unlimited support in 2010.  The total taxpayer money given them since they were taken over by the government, including the current requests, is $145.6 billion.

In the First Quarter, Fanny Mae purchased or guaranteed about $191.4 billion in loans.  Its credit losses were $5.1 billion, which was up from $4.1 billion the previous quarter.  The number of loan defaults was up in the first quarter.  5.47% of Fanny Mae mortgages were delinquent in the First Quarter, which is up from 5.38% in the Fourth Quarter of 2009.  The single-family foreclosure rate was up from 1.03% in the previous quarter to 1.36%.

Obama and the Democrats have refused to include Fanny Mae and Freddy Mac in any financial industry reform bill effort, since they are using them to reduce home foreclosures with loan modifications and will not admit their guilt in weakening the entire financial system of the U.S.  In the First Quarter, Fanny Mae made 94,000 mortgage modifications, after making 42,000 in the Fourth Quarter of 2009.  Together, Fanny Mae and Freddy Mac own or guarantee almost 31 million home mortgages worth about $5.5 trillion.  This is more than 40% and close to half of all home mortgages.

It is common to say that the recession began in the United States and was caused by too much easy credit.  Republicans go on to say government-sponsored Fanny Mae and Freddy Mac caused the recession and Democrats say an unregulated Wall Street caused it.  In fact, it was triggered by the sharp increase in oil prices.  After May of 2004, the price of oil went up in real terms, dropped briefly in late 2006, and then spiked upward beginning in early 2007.  By July of 2007, production in Canada had dropped.   It dropped  in Italy in August 2007, in France in October 2007, and the Euro area as a whole in November 2007. Japan's production reached a peak in October 2007, though it had a one-month uptick in February 2008. The decline in the U.S. was in February 2008.  In January 2008, the OECD leading indicators were down from a year before by 4.1 points in Ireland, 2.8 points in Japan, 2.6 points in Korea, 2.3 points in Sweden, but only 0.8 point in the U.S. Stock prices are another leading indicator. Stock prices peaked in Japan and in the Euro area four months before they peaked in the U.S. and the U.K. in October 2007!  In the 4th quarter of 2008, real GDP was lower around the world than it had been 1 year before, but it had dropped by much less in the U.S. than almost anywhere else. The dollar value of imports into the U.S. did not fall until August 2008 and the consumer purchases did not fall in the U.S. until September 2008.  The U.S. was the last economic engine to sputter to a stop and it took the combination of the oil price spike, the recession already underway in the rest of the world, Fanny Mae's and Freddy Mac's vulnerability, and the Wall Street over-extension combined to put us into this severe recession.

While we cannot blame the entire recession on Fanny Mae and Freddy Mac, they were the most egregious weaknesses and the most easily avoided ones in the U.S. economy.  They were following a foolish policy of easy credit for people who could not make their loan payments under almost any condition of strain and they with the easy credit Federal Reserve were the starting point for much of what went wrong in the private sector.  Government regulation of Freddy Mac and Fanny Mae did not keep them out of trouble and there is no reason to believe more federal regulation would have helped on Wall Street.  In fact, some of the problems on Wall Street turned out to be due to too much regulation and too cozy a relationship with the federal government.  The biggest backers of the unwise lending practices through the years were the Democrats.  Obama had contributed once he was in the Senate and he had worked on a lawsuit against Citibank himself to force them to lower their lending standards before that.  Meanwhile, President Bush had warned a number of times that the easy credit policies of Fanny Mae and Freddy Mac were a major risk for the economy.  McCain also joined in with warnings.  These were all ignored by Congress, which in 2007 and 2008 was controlled by the Democrats.

Fanny Mae and Freddy Mac could not be more controlled by the federal government.  We have only to examine how badly run they are to see the looming disaster as the Democrats try to gain more regulatory control over the major financial institutions of America.  We will be turning investment company after bank after insurance company into the next Fanny Maes and Freddy Macs.  This is exactly what the Democrats want to do.  Imagine how easy it will be to extort money from these more regulated companies and how easy it will be to command many of them to self-destruct.  Even as Fannie Mae had collapsed, Obama and the Democrats had been able to milk it mightily for campaign contributions.  This is the fate of the entire financial industry, if they get their way.

Insane Mark-to-Market Finally Killed

Congress has finally killed the insane mark-to-market assets evaluations which the Democrats imposed through the Sarbanes - Oxley accounting regulation bill in the aftermath of the Enron collapse. This, in so far as a banking and financial crisis befell us, was more the cause of company failures and potential failures than even the inflated home and real-estate values which began the crisis. Yet correcting this very transparent problem, after much time with their fore paws up their Donkey hind quarters, took a backseat to all kinds of posturing and claims that the market was too little regulated. It also took a backseat to executives flying corporate jets and managers being paid bonuses.

The mark-to-market provision, coupled with threatened law suits against accountants who did not rigorously apply it, meant that an asset had to be valued at its very immediate market value. If the asset was illiquid, it was worthless. So, how much is your home worth? You have one day to sell it. How much do you think you can get for it in one day?

Of course this is nonsense. But there is hardly any nonsense too transparent that Congress will not buy into it, if they can put on a grandstand show by going along with the nonsense. That they were certainly able to do following Enron's demise. But, they could have quietly eliminated this part of the deadly nonsense long ago and prevented the current crisis. But, they were asleep at the wheel as usual and well, that fore paw was pleasantly occupied.

The problem of valuing somewhat illiquid assets held by banks and other financial institutions at much lower than rational values is that these institutions can commonly loan out many times as much money as the value of their assets. If the asset is artificially undervalued, then the amount of loans must drop by about 9 times the amount of the undervaluation. It is also ridiculous to tell a bank that an asset is nearly worthless when it is providing a healthy stream of income in the form of mortgage payments or other loan and interest payments. Yet, despite that healthy income, the banks were crimped in how much they could loan by the mark-to-market provision of the absurd Sarbanes-Oxley accounting act.

The end of mark-to-market and a vote in the Senate which will make it unlikely that Congress will pass a carbon cap-and-trade tax-mandate is the reason the stock market went up last week despite the fears of the federal government choosing business managers as they did for GM and as they threaten to do to banks and financial institutions.

No Banking Crisis Exists

Overall lending at U.S. commercial banks is up 5.7% in January from last year. It is at an all-time high of $9.85 trillion! This is just a bit below the average annualized monthly lending growth increase rate of 7.3% since 1990. This bit of a decrease is mostly due to reduced home mortgage lending, which is hardly a surprise given that people are not refinancing and that more people are out of work.

On the other hand, commercial and industrial loans were up 8.4% in January. Consumer loans were up 10.1%. This is a fairly robust lending market, not the crisis we are being told it is.

There are some financial institutions which have participated heavily in the bond market, hedge funds, and commercial paper markets who are in serious trouble, but the traditional banks generally are not. In fact, 90% of the traditional banks are well-capitalized and in pretty good shape.

We have to ask why the politicians and the media have tried so hard to imply that our banks are about to fail as many did in the Great Depression. One has to wonder if the politicians don't think that manufacturing a Great Depression would be good for them, however bad it might be for the rest of us.

Walter Williams - Congress's Financial Mess

Walter E. Williams, professor of economics at George Mason University, has written another interesting commentary on the current financial crisis called Congress's Financial Mess. He notes that the new media have repeatedly insisted that the current financial crisis was caused by deregulation and free markets. He goes on to show that this is not at all the case.

Professor David Henderson, research fellow at the Hoover Institution of Stanford University, studied how regulation has grown in general over the last few decades. He published his results in "Are We Ailing From Too Much Deregulation?" in Cato Policy Report (Nov/Dec 2008). He examined the Federal Register for its lists of new regulations.

• 1977-1980, Carter, annual average of 72,844 pages of new regulations
• 1981-1988, Reagan, annual average of 54,335 pages
• 1989-1992, Bush, annual average of 59,527 pages
• 1993-2000, Clinton, annual average of 71,590 pages
• 2001-2008, Bush, annual average of 75,526 pages

Employees in government regulatory agencies:

• 1980, 146,139 employees
• 2007, 238,351 employees, an increase of 63%

[How do you measure the efficiency of a regulatory agency employee? Is it by the number of new pages of regulations per employee? If so, in 1980 there were 0.50 pages of new regulations per employee and this had dropped by 2007 to about 0.32 pages per employee! Apparently, the more employees, the less efficient they become.]

Regulatory spending by the banking and finance industries:

• 1980, $725 million
• 2007, $2.07 billion, an increase of 286%
  

Under the recent George Bush, there was no hesitation at all in creating new regulations. In fact, the Bush administration specifically wanted to tighten down on risky mortgage and other loans by banks, but Congress would not allow it. The most outspoken critics of tighter credit controls in Congress were Democratic leaders and committee chairmen, including Rep. Barney Frank and Senator Harry Reid.

The Clinton administration made a concerted effort to force Fannie Mae to expand mortgage loans to low and moderate income people in 1999. They used the 1977 Community Reinvestment Act to make the banks make high-risk loans they otherwise would not make. Banks not submitting were fined and their mergers and branch expansion plans were denied or held-up.

In 2008, about $5 trillion of mortgages outstanding were owned or securitized by Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing, and the Veterans Administration. This was one-third of all such mortgages.

[Government also encouraged the inflation of home and property values with extremely low interest rates through inflation of the money supply by the Federal Reserve Board over the last several years.]

To make matters still worse for us taxpayers, Bush gave the auto industry a bailout of $17 billion in addition to about $700 billion in bailouts to banks and financial institutions. Now, the presidents of 36 state government universities are asking for a bailout. State governors and local governments are readying proposals for bailouts, with California $15 billion in the red, Florida $5 billion negative, and Michigan shutting down a prison to save money.

Williams notes that the news media is insulting our intelligence! Unfortunately, they appear to be right about the intelligence, or at least the attention span, of the average voter.

A Request for an Overview Discussion of the Financial Meltdown

I have received a request that I provide an overview discussion of what I believe caused the home mortgage and financial crisis we suffered. Robert G. Curry wrote:

I wonder if you have given some thought to the causes of the current financial meltdown. The history leading up to what happened this year, etc.

Have you covered any of this on your blog?

It would be informative to be able to get an overall picture of the actions from the Carter years to the present of who did what, and who's primarily to blame, both through actions or neglect of action, for the meltdown.

How did we get from the so called "Fair Housing Act," through the "No Red Lining," to the "NINJA" loans, to the packaging of junk mortgages as A rated bonds, to the insuring of those bonds by the people at AIG, to the bailouts?

My response to Robert was:

I have discussed it a number of times, but not as comprehensively as you are suggesting I do. Partly, this is because it is a complex history. Partly, because the time period from Sep through Dec is our busy season in my laboratory, though all of 2008 was very busy for me. But, there is also a very critical component to the housing and financial meltdown which is due to problems caused by local and state governments in addition to the unhealthy contributions to the problem made by the Federal government. This really complicates the issue. I have addressed some of the local problems in a few posts as well.

When you look at where the mortgage defaults have occurred, you find that they are very far from an even distribution across the country. Mostly, the problem spiked in those areas where local and state government have such restrictive policies on home-building that home prices have become inaffordable for most people who in other parts of the country could readily buy a home with their income. In California, the average home buyer is paying 8 times his income to buy a home, when paying more than about 2.5 times your annual income for a home makes you a sub-prime borrower. We can argue that the average home buyer in California has no business buying a home, but human nature being what it is, they still badly want a home. In large part, the fact that homes cost so much in California is because of local and state government policies. For the most part, this is the pattern of where mortgage defaults are occurring. In Nevada the problem is that the Federal government owns 84.5% of the state and land around Las Vegas is not available because it is penned in by Federal land. Florida is another area with a spike of failures, where apparently there is a lot of speculation in homes based on quick improvements and rolling over the homes. This may have other explanations, maybe just that a lot of baby boomers are retiring or will soon and home values may have been rising due to their plans to move there upon retirement and it became an easy money fad to buy homes in anticipation of an easy resale at a higher price. Ohio and Michigan have elevated mortgage failures due in part to the very bad business climate in those states, which is causing them to lose jobs badly.

Because of these local issues, many people have put more and more pressure on Congress for affordable housing. In effect, many present home owners in local areas were happy with the rising home values due to government restrictions and maybe did like less traffic on the roads, lower taxes due to having fewer public schools to build, and more parks, but others wanted housing they could afford and some of the home owners are probably feeling guilty for favoring restrictions that they must realize are causing homes to be unaffordable. Congress does nothing to address the local building restrictions, so they have done as much as they can to press the envelope on lowering the costs of home mortgages. Many of the problem programs you named resulted in good part in response to some very vicious local housing affordability issues.

Of course, this then becomes a good lesson in how excessive government meddling in economic matters and in matters of property, causes all sorts of problems, the attempted responses to which cause still more problems.

Robert has a grasp of much of the path taken at the national level to attempt to make housing more affordable. He understands that this process began long ago and has resulted in a major problem for the economy. I was on the verge some time ago of addressing this side of the problem more thoroughly, but upon looking into it, it became clear that it was even more complex even on the federal affordable housing side of the issue than I had thought. It was going to take some real effort to sort it all out. In the process of looking into that, I realized that a good part of the reason pressure was put on the federal government to make home mortgages more available and less expensive was due to problems already caused by local and state governments which made housing in some substantial parts of the country ridiculously expensive.

There is a push-pull problem here of massive proportions. Government creates a bad problem, then government responds to the screams of pain that result by appearing to address the problems at least in part. Only then it is found to have planted many dozen rattlesnakes into our prairie dog colony. We suffer a financial meltdown and Wall Street and the banks become beggars who are put on the dole. Meanwhile, many home buyers are still sub-prime borrowers and they now cannot get loans. The home building and real estate industries then suffer, but mostly in those areas where most homes are very expensive for most potential buyers.

Meanwhile, the local and state governments are still very happy to follow policies that greatly increase the cost of housing in many communities. There is little movement on their part to address the prime reason for the housing and, ultimately, the banking and financial institution problems. Zoning restrictions, green park policies, antiquated and expensive building codes, excessive federal land ownership, disallowing pre-assembled housing so more local tradesmen will be hired, requiring excessively large home lots, high-handed and unavailable county building inspectors, and many more policies that cause home prices to be much higher than they need to be remain very popular in many communities.

So, as incensed as I am about the many bad choices made by the federal government regarding their powers to influence and control the lending institutions and to put pressure on them to follow unwise and risky lending policies, I do not want us to lose focus on the most fundamental of the originating problems. We allow local and state governments, with some assistance from the federal government, to infringe upon our property rights and thereby to deny many of us the much improved housing that we, in our pursuit of happiness, could have otherwise attained.

Politicians: Greed Caused Financial Crash

Politicians are all clamoring mightily that greed caused the financial crash. They claim this greed was entirely that of Wall Street fat cats with multi-million dollar golden parachutes. They are right that greed had much to do with the crash. They are wrong to locate that greed primarily on financial company executives. The primary source of greed was Washington, state, and local politicians. The greed was primarily for power and secondarily for campaign contribution money and favors to keep them from messing with business. This greed circumvented the usual constraints that financial business executives have to keep them reality-oriented. This political greed forced businesses to take foolish risks to satisfy politicians who claimed they were guilty of racial discrimination if they did not loan enough money to people who did not have enough income to pay back the loans. This was the purpose of the Community Reinvestment Act given primarily to us by the Democrats.

Fanny Mae and Freddy Mac were set up as government-sponsored businesses to encourage risky home mortgage loans to people and package those in the form of securities that financial businesses and retirement funds would buy. The oversight of the Securities and Exchange Commission was minimized by Congress. Low interest rates set by the Federal Reserve further fed the madness. Local and state governments drove up the cost of housing with building restrictions often called growth management. People in managed growth places such as California where homes cost 8 times their average family incomes clamored for subprime mortgages and Congress saw that Fanny Mae and Freddy Mac provided them. Finally, when the financial companies found that they held mortgage loan-based securities with large subprime obligations and no one would pay anything like their purchase price for them at this time, they had to write their value down to almost nothing to be compliant with Congress' Sarbanes-Oxley accounting legislation. This further insured that no one could afford to buy these securities, even though only a fraction of the mortgages they are based on will not be repaid.

Some business executives went more overboard than others, thinking that the government policies would protect them from the consequences. Most of these executives have lost their jobs and most of the value of the company stock that was used to reward them for their work has vanished. But.....as usual, our politicians are unscathed and unrepentant for their dastardly roles. They have been able to use the crisis to grab even more power. The more they clamor, the more responsibility they generally have for the mess our economy has been put in. Look primarily to these polititicians, who are so good at distracting us from the real issues, for those most responsible for this catastrophy. Remember that many of these same rascals are backers of catastrophic global warming theories that will allow the government to take control of our use of energy, as well as our financial industries. Doubt their motives at all times! Throw these rascals out of office. Sweep the House and Senate clean.

Unfortunately, both of the major presidential candidates are busy spouting the nonsense that the crash was caused by the greed of Wall Street and of fat cat executives. They are among those trying to distract us from the real issues of governmental interference in the free market. When the market is free, businessmen act to make sound investments, not unsound investments. The scale of this financial crash is itself a great indicator that it was primarily government policies that fed the problem. This was clearly the case in socialist Europe as well.

We are now unreservedly the Socialist People's Republic of the United States! We must call a spade, a spade. Rational men will soon be retiring to Galt's Gulch as Atlas shrugs everywhere. The next president of the United States will either be a moderate socialist or he will be a very committed and very radical socialist. This socialist president will have a very socialist Congress to work with. The sovereign American individual will find nothing but disrespect and, increasingly, chains.

Alan Reynolds has written an interesting article on the plight of those businessmen who most followed Washington's lead and who most went overboard with risky loans and subprime-mortgage based securities.

Growth Management Laws Created Housing Bubble

For some time, I have been pointing out that the rapid increases in home costs are limited to some areas of the country and that these rapid increases have been largely determined by local governments, or in some cases by state governments. Even the Federal government has contributed in some areas out west where the Federal government owns a large fraction of the land. Where growth management planning by governments is not practiced or has been very newly implemented, the cost of housing has simply increased at about the inflation rate. Home sales are still brisk in areas without such growth management and people have little need to resort to subprime home mortgages in such places. The story is catastrophically different in California, Oregon, Washington, Arizona, Florida, Hawaii, Maryland, New Jersey, Rhode Island, and Vermont, where the states have mandated growth management laws. The Denver and Minneapolis-St. Paul areas have also been hit due to local government restrictions. Randal O'Toole, a senior fellow at the Cato Institute, has written an excellent article on this called Big Burdens from Growth Management.

He points out that a four-bedroom, two-and-a-half bath home in San Jose, CA costs $1,100,000, while the same home costs $550,000 in Seattle, WA and only $250,000 in Raleigh, NC. San Jose has practiced growth management since 1970, Seattle since 1985, and Raleigh has the wisdom not to interfere. Housing costs in urban areas depend heavily upon how long growth management policies have been followed. O'Toole points out that several fast-growing states such as Texas and North Carolina have home price to buyer income ratios of less than 2.5. In comparison, the average ratio is more than 9 in San Jose! In Dallas, this ratio is slightly more than 2 and the area growth rate is 40% since 1990, compared to San Jose's growth of only 10% in that time. The average home price to buyer income ratio in all of California is more than 8. If more than 30% of your income goes to making your mortgage payment, you will most likely have to take a subprime mortgage. Consequently, it is most in the growth-managed areas that subprime mortgage loans have become a major problem.

The difference in home price brought on by government growth management requirements is such that in 2006, home buyers paid more than $250 billion in planning taxes, the cost of this government meddling in the home and land markets for that single year. Needless to say, these costs keep many families from owning the homes of their dreams, which is exactly what they are supposed to do. From 1940 to 1960, homeownership grew from 44% to 62%, but has grown to only 69% since. Homeownship has grown better in most states with no growth-management laws. This is important, because a home is the biggest investment most families have. It also provides the most common means for people to finance a new small business.

It is commonly said that growth management prevents the "urban sprawl" that planners hate, but that most people's dream of a single-family home with a yard requires. Yet, all urban areas now account for less than 3% of the land in the U.S. California requires 95% of its people to live in 5.1% of that state's land, but with no growth management, only about 8.5% of the state would be urban. In order to keep 3.4% of the state's land unoccupied, the state has tripled the cost of a home. Oregon requires its people to live in 1.25% of the state, but with no requirement and assuming the same densities of people in urban areas as in the rest of the country, they would occupy less than 1.7% of the land in Oregon.

O'Toole points out:

"Of course, when we say a particular law has 'protected' open space from development, we usually mean that the law has denied rural landowners the right to use their property as they see fit. Because landowners receive no compensation for this taking of their property rights, it should be viewed with even greater outrage than the Supreme Court recent decision allowing cities to take people's land by eminent domain -- with compensation -- and give that land to private developers."

"Russians say that Americans do not have any real problems, so they have to make them up. Urban sprawl is one of those made-up problems. Unfortunately for U. S. citizens, efforts to control sprawl have led to very real difficulties: unaffordable housing, higher land costs for business and industry, housing bubbles and busts, and increasing barriers to homeownership for low- and moderate-income families."

In an effort to address some of these problems, local governments create subsidized housing, which adds to the tax burden. They sometimes require builders to build money-losing housing so they will be allowed to build other single-family and townhouse homes, to which they shift the costs. This makes them more expensive. The federal government uses Fannie Mae and Freddy Mac to help insure a market for subprime home mortgage loans. Fanny Mae and Freddy Mac fed the bubble in the securities based on these unstable loans to the max, while greasing the palms of many Congressmen with heavy donations to keep them onboard with the program. It also used the Community Reinvestment Act to force lenders to make subprime loans to many of the riskiest borrowers. Critical error was piled upon critical error has governments wrecked havoc on the free market and addressed every problem with more government mandated havoc. Without the government interference, no one would have been interested in loaning out their money in so many risky subprime loans.

The financial problem we are facing today was not caused by Capitalism or by the free market, as the socialists in government and in the Democrat Party are claiming. They have been clamoring mightily to try to prevent the people from understanding what did cause the problem. It was caused by socialist governments all the way from the local to the federal levels.

This is not the first housing bubble that has burst. A bubble occurred in the 1970s in the few states with growth management then, while a worse bubble erupted in the 1980s with more homes involved as urban planning spread. O'Toole says this present bubble affects about 40% of the nation's housing. The bubbles are becoming worse as more and more areas turn to urban planning.