Thursday, September 10, 2009

Events Leading to the Great Bailout: Part One

Thomas Sowell wrote an important book titled The Housing Boom and Bust. He traced the causes of the boom and subsequent bust and his analysis refutes many common notions about what actually took place. Like much of Sowell's writing this book is an educational adventure which focuses on both political and economic decisions that led to one of history's biggest economic debacles. Here are some highlight points from his first chapter which is titled The Economics of the Housing Boom.


  • Some factors contributing to the boom and bust were localized and some were global.

  • The law of supply and demand played its part particularly as it relates to less land leading to higher prices in some local markets.

  • As the boom peaked the localities with the greatest increases in the price of homes, compared with a five year prior period, were all located within California.

  • The impetus for the rise in the cost of California land can be found in an artificial shortage of land. The shortage resulted from changes in laws and policies affecting land use.

  • A major cause of land use restriction can be found in movements advocating environmental protection or preserving open space or farmland. The restrictions are attributable to the values of special interest groups which may not reflect the values of the larger society or its interests.

  • To cite an example, more than half the land of San Mateo County was declared as open space and off limits to home building construction. Economic laws of supply and demand predict what ensued- a rapid rise in land value resulting from policy decisions.



Reference:

The Housing Boom and Bust by Thomas Sowell; Published by Basic Books; Copyright 2009; Chapter 1, Pages 9-15.

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