Regulation We Don't Need

The problem is that when house prices are going up, there is no such thing as a bad loan.

True enough, but you should also ask why house prices were going up so much. Were it not for the artificial supply constraints, prices would have increased only a bit (see Houston). Lenders would not have made so many foolish loans if slow-growth zoning policies hadn't suppressed the supply response.

Arnold, I agree. Reinhart's thesis is just silly ("The problem with securitization is that it dilutes individual responsibility. The mortgage broker can easily become disconnected from the outcome of the initial lending decision...").

The same can be said for trade in general: if you make boots for yourself, you are going to suffer the consequences is they are of shoddy quality. But if you sell them to a wholesaler, who sells them to a retailer etc., pretty soon the individual responsiblity will be diluted - you cannot expect this process to deliver quality boots!

Jeff,

And the other side of that coin lies with the Fed.

Super low, unjustified, unrestrained interest rates encourage more home buying and drive up prices.

@Jeff,

I'm probably misunderstanding your point: I thought that the worst US excesses were in locations (AZ,CA,FL) where the (housing) supply constraints were the most lax.
Here in London we have geology and gravity constraints which would better prove your case. Not so artificial.

Regulations have longer lives than memories though, which makes them worth doing.

@Phil,

Not so. California is where the "slow growth" movement really got underway way back in the late 1980's and 1990's. Various zoning restrictions, proffers, lawsuits, and just plain obstructionism greatly restricted the number and kind of houses that can be built in areas where people actually want to live. New housing development was so restricted in areas like San Diego, L.A., and San Francisco that people were forced to move ever further out, making traffic ever worse and turning the Inland Empire into one giant bedroom community. The fact that people were putting up with two hours commutes each way just shows how badly they wanted houses, houses that were priced out of reach in closer-in areas due to the multiple kinds of building restrictions.

Florida is much the same story. In areas like Houston, where there are no zoning laws, there was even more housing growth (proportionally) than in California, but since suppliers were free to respond to increased demand, the stock of housing went up a lot without much increase in price.

The market works, when we let it.

@John V:

Super low, unjustified, unrestrained interest rates encourage more home buying and drive up prices.

Oh, I agree with you that the Fed kept (and still is keeping) short interest rates much too low for far too long. This WSJ op-ed by James Grant describes what happened very nicely.