Thursday, March 26, 2015

Innocence ablog

The Conversable Economist, Timothy Taylor, treads softly on the feelings of the Housing Cause Denialists;
Let me offer a speculation: Say that the rules for taking our a mortgage had been tighter over time. Imagine the standard was that banks would decide what you can afford based on 25% of your income, not 30%, or that mortgages were typically available for 15 or 20 years, not 30. My guess is that bank lending for mortgages would be smaller. The size of homes might well have increased, but not as quickly. Less of US capital investment would be allocated to housing, which would make it possible for more to be allocated to investments that can raise the long-term standard of living. The US economy would be less vulnerable to recession. People who were less stretched in making their mortgage payments would be less likely to face default or foreclosure. And my guess is that many of us would have adapted perfectly well to living in smaller homes, because the smaller size would be usual and typical and what we expect. The money we weren't spending on housing would easily be spent on other forms of consumption.
In short, the push for making mortgage loans more easily available is sometimes presented as if it can only make people better off. Either they can borrow the same amount as before, or they can decide that they would prefer to borrow more. But making mortgages more available also has number of tradeoffs, both for individuals who "can't eat bricks and mortar" and for the broader economy.
We at HSIB, of course, have offered more pointed speculation a number of times on this blog; suppose the federal government hadn't launched an all out offensive against the too strict lending standards (even racist) on mortgage loans?  As Day and Liebowitz put it in 1998;
 The currently fashionable "flexible' underwriting  standards of mortgage lenders may have the unintended consequences of increasing defaults for the 'beneficiaries' of these policies.  
Had the banks been left alone to set their own mortgage lending standards, as they pretty much did before the mid-1990s, how would the financial crisis/Great Recession have happened?

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