About those policies causing this mess | Myrtle Beach Sun News

“They want us to go back to the same old policies that got us into this mess in the first place.”

Was the speaker President Barack Obama? Bill Clinton? Rahm Emanuel? Debbie Wasserman Schultz?

All of the above – and many more of the luminaries who graced the stage at last week’s Democratic National Convention in Charlotte, N.C. This has become a standard, stump- speech line, yet no on – bothers to spell out exactly what those policies are.

Before we get to causality, we have to define the “mess” they all talk about. I assume it refers to the 2008 financial crisis, which rocked the United States and global economy to its foundation, threatened to bring down the banks and left a landscape of foreclosed homes in its wake.

And what was at the root of the mess? In other words, what single element precipitated the crisis?

Answer: bad loans. The same thing that historically has gotten banks into trouble.

This time around, it was subprime and substandard mortgages that were bundled, packaged into securities, sliced, diced and sometimes squared, and sold to investors as AAA-rated securities.

So what policies were responsible? The government’s unwritten, and underwritten, policy on housing.

Start with housing’s taxed-advantaged status. Mortgage interest and real-estate taxes are deductible. The first $250,000 of capital gains ($500,000 for a married couple) from the sale of a home is exempt from taxation as long as you have lived in it for two years. The tax laws on capital gains were relaxed in 1997, when Clinton was in the White House.

Why is housing tax-advantaged? Because the folks who write the laws decided it should be. The government enacted laws to encourage lending to minorities and low-income households. (Lenders might say “encourage” understates the thrust of the law.) It established affordable-housing goals for Fannie Mae and Freddie Mac. And it closed its eyes to financial chicanery at the two government-sponsored, public-private enterprises, which are now wards of the state.

And while we’re on the subject of Clinton, I almost fell off my chair when I saw his recent ad endorsing Obama.

“The Republican plan is to cut more taxes on upper income people and go back to deregulation,” Clinton says. “That’s what got us in trouble in the first place.”

Deregulation? As in the repeal of Glass-Steagall in 1999? Didn’t some Obama campaign official vet the ad before the president gave it his imprimatur?

The Financial Services Modernization Act of 1999, better known at Gramm-Leach-Bliley, removed the barriers among banks, investment banks and insurance companies. Banks got bigger and more leveraged. Pretty soon, they were too big to fail.

Next came the Commodity Futures Modernization Act, which exempted over-the-counter swaps and derivatives from regulation. It was signed into law in 2000 by … Bill Clinton. Leading the deregulatory charge during his administration were Treasury Secretary Robert Rubin – who subsequently landed a plum job with no line responsibility at Citigroup, which had already merged with Travelers before Glass-Steagall was repealed – and his No. 2, Larry Summers. The idea was to distribute risk; the effect was to magnify it.

Government policy had a role to play in the misallocation of capital into housing. But that in no way exculpates the other actors in this saga: lenders, who had no incentive to perform due diligence since they sold the loans as soon as the ink was dry; compliant rating companies that failed to understand that over-collateralized junk is still junk; Wall Street investment banks, which were only too happy to satisfy investor demand by feeding them high-yielding, AAA-rated securities; the Federal Reserve, which kept interest rates too low for too long; regulators, who were asleep at the wheel; and yes, even homebuyers, who heard there was a free lunch and wanted a bite of it.

All were to blame. Yet the pursuit of homeownership through legislation, incentives and relaxed loan standards was the driving force.

The government is still trying to find ways to make it easier for underwater homeowners to refinance their mortgages and stay in their homes. For many of these people, especially the unemployed, a home is no longer a castle but an albatross, preventing them from moving to areas of the country where businesses are hiring.

Maybe it’s time to take the goal of homeownership down from its lofty perch. It really doesn’t belong in the category with life, liberty and the pursuit of happiness.

Baum, author of “Just What I Said,” is a Bloomberg View columnist.