Inequality and the crash: How egalitarian policy fueled the US housing crisis

by Dave

University of Chicago economist Raghuram Rajan makes the argument I was trying to make, only more articulately:

[T]he political response to rising inequality—whether carefully planned or the path of least resistance—was to expand lending to households, especially low-income households. The benefits—growing consumption and more jobs—were immediate, whereas paying the inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly.

Politicians, however, prefer to couch the objective in more uplifting and persuasive terms than that of crassly increasing consumption. In the US, the expansion of home ownership—a key element of the American dream—to low- and middle-income households was the defensible linchpin for the broader aims of expanding credit and consumption.

Exactly! Mr Rajan goes on to say:

In the end, though, the misguided attempt to push home ownership through credit has left the US with houses that no one can afford and households drowning in debt. Ironically, since 2004, the homeownership rate has been in decline.

The problem, as often is the case with government policies, was not intent. It rarely is. But when lots of easy money pushed by a deep-pocketed government comes into contact with the profit motive of a sophisticated, competitive, and amoral financial sector, matters get taken far beyond the government’s intent.

The road to hell is paved with good intentions.