What Could Have Averted the Housing Bubble?

Greg Ip has a strongly-worded yet sensible rejoinder to Alan Greenspan's latest attempt at self-absolution, and it's well worth reading:

In the earlier part of this decade Mr Greenspan asserted on a number of occasions that while America might have local housing bubbles, there was no national housing bubble. Yet he now asserts there was a global housing bubble. It has always puzzled me how he could go from seeing local bubbles to a global bubble without at some point diagnosing a national bubble.

Ip reckons that if Greenspan had hiked interest rates into a recession-inducing 8%-to-10% range, that might have sufficed to stop the housing bubble -- but of course that would have violated the Fed's mandate. Alternatively, says Ip, Greenspan could have taken the regulatory approach: requiring 20% downpayments or mortgage insurance for all mortgages, for instance, or requiring stricter underwriting at the originator level. But of course, these moves, as Ip says, would never have been implemented by Greenspan, the great deregulator.

Ip says that there would have been a reduction in homeownership if the Fed had followed this course:

It is hard to believe that society would have been significantly worse off if we'd limited the growth in home ownership to, say, 66% instead of 69%, by excluding people unable to make a substantial financial commitment.

I'm not even sure that is true: the 69% figure was hit between the second quarter of 2004 and the first quarter of 2005 -- before the worst excesses of no-money-down mortgage lending. I suspect that the rise in homeownership was more a cause than an effect of the housing bubble -- that homeownership rates served as a leading indicator of house prices.

But I certainly agree that if the US had followed the lead of pretty much every other country in the world and simply regulated its lenders, a lot of the worst excesses of the bubble could have been avoided. I don't know where major regulatory overhaul stands on the Obama administration's list of priorities, but I do hope that by the end of this administration, we will no longer be in a position where lenders can lend out billions of dollars to homeowners with essentially no regulatory oversight whatsoever.