Wednesday, July 23, 2008

Arson and Politics

Thomas Sowell, a senior fellow at the Hoover Institution, writes in one of his recent columns, "We don’t look to arsonists to help put out fires but we do look to politicians to help solve financial crises that they played a major role in creating."

Politics had a leading role in creating the current housing crisis, says Sowell. Consider the following:

1. Political pressure forced lenders to loan money to unqualified borrowers.
2. Land use regulations forced up the price of housing, leading borrowers to seek "creative financing."
3. The Federal Reserve pushed interest rates to historic lows, encouraging even more borrowing, bigger loans, and more "creative financing."

Sowell says the housing crisis is more political failure than market failure. But that won't slow don't the political rush for action. "The last thing politicians can do in an election year is nothing. So we can look for all sorts of “solutions” by politicians of both parties. Like most political solutions, these are likely to make matters worse."

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