During the past few weeks, obscure economics professors have appeared on television screens and in the text of countless newspaper articles to explain how a host of institutions, subsidies, shadow markets, and banking tricks have pushed our financial system to the brink of collapse.
Despite this nationwide college symposium, however, the most important lesson of the country's recent financial turmoil has gone untaught: The United States might be better off financially, economically, and socially if it were more like San Francisco and were a nation of renters.
To the average American ear, this is heresy. Our system rests upon an artificial premise that says homeowners are superior citizens. This contrivance, the "American Dream," is the result of tireless campaigning by the real estate industry almost a century ago, before the current housing finance system's policies and institutions were cobbled together. But as events of recent weeks have shown, homeownership does an inadequate job of building and preserving American wealth, ensuring political stability, or even providing people with permanent places to live.
At its most immediate level, the current crisis stems from a wave of mortgage defaults striking hyperleveraged financial institutions. But deeper down, blame rests with a fundamental and erroneous American policy San Franciscans have mostly ignored. According to the U.S. census, 61 percent of San Francisco residents are renters, while about the same percentage of Americans are homeowners.
There's no immutable law of economics that says individual wealth and mountains of government subsidies must be tied up in housing prices. It's entirely possible for that money to rest instead in parks, schools, health care, pensions, and, yes, the ability to live in a decent rented home. Personal savings could just as easily be put into investments other than cul-de-sacs. Companies developing communications technology, health care, energy, or clean transport might employ capital more effectively than the Warmington Group, a developer of six-bedroom row houses in Brentwood.
Far more than elsewhere, this has been the thrust of policy in San Francisco. It's a path that has sometimes meant failure and waste. But as we look at the economic and social wreckage around the rest of the country, the alternative seems far worse.
Great financial collapses come coupled with indelible images. An assassin's gun to the head of presidential candidate Luis Donaldo Colosio preceded the 1995 Mexican financial meltdown and $62 billion bailout. The so-called Steve Peace Death March, where donor lobbyists packed into a room to craft doomed energy policy, presaged the 2000 California electricity debacle and $20 billion bailout.
In advance of this month's $700 billion bailout, we had the Hallmark, the Cardinal, and the Tribute — model names Realtors gave to McMansions in Brentwood, a distant Bay Area suburb now riddled with foreclosures. Years hence, this bizarre landscape will likewise be viewed as a harbinger that something was terribly, terribly wrong. The empty Brentwood behemoths — more than an hour's commute from job centers in Oakland and San Francisco — are emblematic of America's flawed solution to the problem of providing decent, affordable housing to working people while helping them accumulate savings.
It's a solution fraught with expense and risk. The federal income tax code allows homeowners to deduct mortgage interest, and forgives profit from a house's resale in most cases. Federal tax policies help state and local governments subsidize financing for homebuyers. The federal government has provided mortgage insurance and guarantees. The government sponsored the creation of the secondary market for mortgages and developed institutions specializing in housing finance, while forcing private financial institutions to channel funds toward housing. The combined result is trillions of dollars in government subsidies and a state-organized financing system that's massive, labyrinthine, delicate, and opaque.
In recent years, this government-chartered system became supercharged as computerization, credit scoring, and the increasing sophistication of secondary mortgage markets helped put detached houses in the hands of nearly all who wanted them. The problem was that nobody asked whether this homebuying support system was a good thing. Now the government seeks to bail out the U.S. housing finance edifice without asking the obvious question: Should taxpayers continue to subsidize homebuyers?
It wasn't always this way. In the new book Chasing the American Dream: New Perspectives on Affordable Homeownership, Lawrence Vale, head of MIT's planning department, describes how this conventional wisdom and the generations of public policy based on it were the fruits of an aggressive campaign led by President Herbert Hoover to turn individual homeownership into a national moral imperative. "The high rate of homeownership in the United States has been neither an accident nor an inevitable outcome of land availability and widespread prosperity," Vale writes. "Rather, it has been nurtured by generations of public policy, which were in turn preceded by concerted efforts to instill an ideological belief in the moral value of the owned home."
By 1931, Hoover's pro-homeownership campaigns had distributed millions of flyers, set up more than 7,000 local committees, and even impugned the moral and sexual adequacy of renters. Ownership of detached houses protected families from "the unwholesome and not infrequently contaminating ideas of the floating classes that predominate in the close-in rental districts," one pamphlet claimed, making an opaque, typical reference to immigrants, minorities, and Communists.
Homeownership, Hoover said, "permeates the heart of our national well-being. It makes for happier married life. It makes for better children. It makes for confidence and security. It makes for better citizenship." Any San Franciscan knows that's bogus. The city's renters have organized themselves into 400 citizens' groups apt to fill mass meetings at a moment's notice on issues ranging from public transit to pets' rights.
Hoover's limp response to the Great Depression discredited his presidency, but his cherished homeownership drive remained a national government-supported goal. The massive home foreclosures of the Depression didn't sway the government against the apparently risky practice of encouraging everyone to own homes — instead, the government created institutions such as Fannie Mae, the Federal Housing Administration, and the Federal Home Loan banks, designed to make it easier and safer. Zoning and the creation of the national highway system ensured that this easy-credit system had plenty of single-family-home products people could buy.
Looking back at this fall's financial crisis, I hope people will end up recalling the foreclosed ranchettes of Brentwood and question the cost of the American Dream. For Congress to have rejected or postponed last week's bailout bill would have been foolish. Without it, lending could evaporate, and so could businesses and jobs. But as Americans seek a course picking through the aftermath, they should look toward the beacon on a hill that is San Francisco.