How to Prevent a Repeat of the Credit Crisis

Posted by Rob Viglione

September 25, 2008

by Rob Viglione

The terms “credit crisis” and “housing bust” will be forever stamped upon our generation. Many ordinary and not-so-ordinary people are suffering, and there’s a growing public discontent for the way things have been done. Some are calling for the dissolution of Capitalism in America, declaring that we finally have proof of the failings of free enterprise! The truth is quite to the contrary. This financial meltdown was largely caused and absolutely perpetuited by a series of government incursions into the economy!

There are three main groups behind the housing madness: local and state lawmakers, federal regulators, and the Federal Reserve. Land use regulations stand at the heart of the issue, with local and state legislators placing significant and often-times arbitrary restrictions on new development. In coastal California, for instance, cities largely dictate the land use policies of surrounding rural areas, restricting new development to alleviate growth in demand within the cities. This is why housing prices in Los Angeles increased at a far higher rate than those in Houston, despite greater population and living standard growth rates in Houston.

In an effort to increase homeownership amongst low-income demographics (i.e. people who cannot afford homes), the Department of Housing and Urban Development (HUD) pushed the mortgage institutions to increase the number of subprime loans in their portfolios. This was social engineering at its finest, with the results now evident. The Environmental Protection Agency is another regulator itching to enter real estate by connecting climate policy to land use regulation.

Most people cannot buy homes without credit, so we must look towards monetary policy to explain the housing boom. In response to 9/11, the subsequent stock market drop, and potential economic slowdown, the Federal Reserve dropped interest rates to near-zero. This unquestionably signalled to the market to borrow borrow borrow! Rates were kept insanely low for a prolonged period of time, only slowly adjusting upward through the peak of the boom.

The big takeaway is that government must bear, at a minimum, some of the blame for the unprecedented explosion in housing prices and warped perception of risk that it involved. Rather than seek relief in the form of MORE government involvement, we ought to consider how we can reduce the regulations and bad policies that led to the speculative bubble. From an individual perspective, understanding how regulations and policies affect markets enables one to exploit the resulting opportunities. If you can remember that more regulation almost always means higher prices, then you will do fine!

About the Author:

Rob Viglione is a writer, investment fund manager, real property broker, and consultant. He recently formed Viglione & Partners Assurance Group, L.P., SoCal Real Estate Advisors, and began The Freedom Factory.

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