Expert Comments: Addressing America’s Credit Crisis

Published December 21, 2007

(CHICAGO, Illinois – December 21, 2007) On December 18, the Federal Reserve proposed new rules designed to ease the country’s credit crisis and address what it deems to be deception and fraud in mortgage lending.

Experts contacted by The Heartland Institute offered the following comments about the proposal. You may quote from this statement or contact the experts directly at the phone numbers or email addresses provided below.

“Many of the proposals for more regulation will likely limit the ability of Americans of modest means to purchase their own homes. A relatively open mortgage market has brought America the highest home ownership rate in history. We should be very careful in making any changes to a system that despite its flaws serves most Americans very well.”

Eli Lehrer
Senior Fellow
Competitive Enterprise Institute
[email protected]

“The increasing riskiness of mortgages is not the only sign that America is experiencing a housing bubble. The ratio of house prices to rents is well above its historical average, as is the ratio of prices to median incomes. A fifth of American mortgages in 2003 were for more than 90 percent of the purchase price. Any fall in house prices could leave a lot of them with negative equity, forcing them to default.

“The process of the bubble creation works the same way on the reverse side, except a bit more quickly. As housing prices decline consumers will cut back on their spending to make up for lost home equity. That lower spending will likely lead to a slowdown in GDP growth. We may already be seeing the slowdown in lackluster Christmas 2007 consumer spending and in a year-end stock market downturn. The stock market is a leading indicator.

“Asset bubbles are not caused by government, although unusually low interest rates made it easier to finance the current housing price run up. Bubbles are the result of investors overestimating the true value of a risky asset. The lenders and the home buyers both took on what was predictably a very risky asset; any risk has the possibility of great returns, but also the possibility of great losses.

“To compensate either party for a downturn teaches a lesson that government should not be in the business of teaching.”

Barry Keating
University of Notre Dame
[email protected]

If you would like further information on this policy debate, please contact Matthew Glans, Heartland’s legislative specialist on insurance and finance, at 312/377-4000 or by email to [email protected]. For further information about The Heartland Institute, contact Harriette Johnson, mainstream media manager, at 312/377-4000, email [email protected].