Constructive Construction

Wait a second. So banks face powerful regulatory pressures to make loans to people with shaky credit … and the predictable result is the fault of the whole banking superstructure?

Ryan Avent’s remarks on greedy borrowers may have struck Ezra as impolitic, but Ryan explicitly said they were only part of the story. Nicholas Retsinas puts it well here.

“If we turn the clock back 30 years ago, we had redlining,” said Nicholas Retsinas, director of the Joint Center for Housing Studies at Harvard University. “In the last few years, we have had the opposite — an overextension of credit by lenders and an overextension by borrowers.”

Moreover, trying to impose a rational design on “the whole banking superstructure” from above is likely to result in failure. Note that we’re trying to give the same regulators who created the crisis the power to remake the housing market along politically appealing lines. (Avent offers a useful follow-up here.)

A more constructive approach, to my mind, would be to encourage reforms that will lower the cost of housing. Barry LePatner’s Broken Buildings, Busted Budgets includes a number of worthwhile ideas. For example, without imposing any onerous regulations, government agencies could demand fixed-price contracts.

By weighing true risk against higher profitability, smaller firms will no longer remain the norm.

My guess is that the private sector will follow lead of governments, but this will not be imposed by fiat.

Another development I’d want to encourage is the rise of the Open Source Building Alliance, which promises massive economic and environmental gains. Again, the government does a lot of purchasing. Just as the US Congress massively promoted the rise of interchangeable parts by backing entrepreneur Eli Whitney with a government contract, we could do much the same for interchangeable building parts.

And of course we could scrap the mortgage interest deduction in favor of a “Home Credit.” I’d also favor relaxing zoning laws, but that is inherently more controversial. So is breaking the link between home ownership and school quality by allowing school choice.

Taken together, these measures would do a great deal to lower the cost of housing. None of these are glamorous steps, to be sure, and none of them involve imposing top-down control on the banking industry. They do help address the issue we supposedly care about, namely making high quality homes more accessible to people with modest incomes.