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Part eight of a nine-part series.
The housing bubble has caused enormous problems in the U.S. economy. To make sure this crisis doesn't recur, we should:
- Require income-based appraisals for lending purposes. Home prices should be able to rise as high as buyers are willing to bid, but loans based on federally insured deposits or reserves should be limited to amounts that are reasonably supported by local-area incomes. Private lenders should be allowed to lend as far beyond that as they desire, but only with limited recourse against the borrower and without taxpayer support for losses since such support creates a clear incentive to lend incautiously.
- Avoid government actions that support artificially low interest rates. Recessions are okay; they clean out the dead wood and keep everyone honest. Interest rate stability should be a higher priority then non-stop increases in the U.S. gross domestic product (GDP) so individuals--especially retirees--and companies can earn reasonable returns on their investments. This fix is more important than ever since a massive wave of Baby Boomers is about to retire.
- Shine the light of day on credit default swaps. Create a market so these instruments can be valued. Require those valuations to be disclosed so investors can evaluate the risk of investing in companies like AIG. Then let those investors bear that risk alone without taxpayers' backing.
- Bring back key regulations that were lost in the last decade. It may not make sense to completely repeal the Commodity Futures Modernization Act, Financial Services Modernization Act and Taxpayer’s Relief Act, but clearly these acts went too far. Certainly, there are ways to allow the creation of innovative new financial products without placing the full risk of those innovations on the backs of depositors' and taxpayers'.
- Limit new housing permits to a rate that's supported by reasonable projections of population growth. Counties also should require that the size and anticipated cost of approved new housing generally match local-area incomes. One way to achieve that objective would be to limit the supply of new housing separately for each income quartile.
- Make sure no financial institution is ever “too big too fail.” Risk of failure ultimately makes companies stronger and none should be above it, especially at the expense of taxpayers, who were largely left out of the gains. Though I believe it is unavoidable this time, we should work to never again privatize profits and socialize losses.