There is a lot being written about the subprime mortgage crisis, with a lot of blame being cast about. Democrats blame President Bush, of course, but that is hard to justify. (Democrats like Al Gore and John Kerry blamed President Bush for hurricane Katrina, so they are capable of being downright sill.) The subprime mortgage crisis is interesting because not many of the loans are actually in default, but, because of the decline in housing prices, the home pledged for many of those that are in default is now worth less than the loan amount. The crisis seems to have been caused by machinations of large banks that packaged and sold loans to investors. (These packages of loans were called Structured Investemtn Vehicles, or SIV's) At Citibank some genius who no doubt got a large bonus decided to guarantee to re-purchase the SIV's at the original price. This cost Citibank billions of dollars when the market crashed, and the buyers returned the SIV's. There are some estimates that the subprime mortgage crisis has resulted in losses of $400 billion. That seems incredible since few of the loans are in default, and even if the loans in default are "underwater" the houses are still worth something. But, with the market in freefall, it was judged that it was impossible to value the SIV's so regulations reguired that the banks write them off as total losses. Since most of the loans are still paying, and the houses in default are not worthless, sometime in the future the bank will make huge profits as the loans are repaid, or the re-possessed houses are sold. I suspect something crooked has happened here; it is hard for me to tell who profited, but I'm sure someone did.

There are some who think zoning laws and other local regulations had a part in the subprime mortgage mess. These laws and regulations artificially push up prices making it harder for people to buy homes, and causing more people to resort to subprime loans. Cities like zoning laws that push up the value of homes and land since much of their tax base is a percentage of the value of property. Real estate developers also like zoning and regulation since they can influence zoning commissions to increase the value of their property by changing zoning. (Senator Reid profited from such a zoning change: Interestingly enough Senator Reid's son was on the zoning commission. But, of course we must assume there was nothing untoward in that case, though it is interesting that the land was not in Senator Reid's name and he forgot to mention it in his financial disclosure statement to the Senate, just a technicality.) When I was a boy in Houston there was a bitter political debate about the need for a zoning commission. Some claimed that Houston, which then had about 500,000 citizens, could never grow without zoning. The voters defeated the issue, and they were correct since Houston now has 6 million citizens. And, curiously enough, Houston homes are among the cheapest in the nation. Here is a discussion about how zoning and regulations increase the cost of homes, and also increase volatility in home prices.

http://www.cato-at-liberty.org/2008/02/17/land-use-regulation-and-the-credit-crisis/