This presupposes that "most" people think nothing of the stigma associated with living in a trailer, or the vulnerability in natural disasters, or the lack of sound insulation(privacy).
Though I'd agree that certain places(e.g. California, New York City) have artificial restrictions on the housing supply which have the effect of pricing out newcomers.

Martin Brock: "Did you read it? This article has Frank saying that FNMA and FHLMC are not Federal obligations. I say he was right. "

It doesn't matter any more that the GSEs were taken off the books in the late '60s/early '70s than it did in the case of Enron, which also had massive underfunding of "independent" partnerships that was successfully concealed for a while.

I seem to remember a few articles from the WSJ in 2002 about the similarities between Enron's situation and the one we've seen this week.

As to the Ron Paul worship… To each his own. He sounds like a whiney 9 year old to me and looks like Marshall Applewhite. I can't get past that.

Artificially low interest rates create incentive to borrow and regulators increase the barriers to entry for competition. Mix in a few congressional mandates to loosen credit standards to make their constituents happy (home "owners" tend to vote for incumbents, it turns out) and you have giants which are too big to fail taking enormous risks. And why not? If it all goes pear shaped, they'll just go crying to their mama for more candy.

I don't see why 20% down is some kind of magic number.

It doesn't have to be exactly 20%. It can be higher or lower depending on many factors used to assess the borrower's credit worthiness and the risk profile of the asset which is to be purchased with the proceeds of the loan. Just as Mohamed Yunnus discovered a way to profitably lend to the very poor, someone would have found a way to profitably provide mortgages for low income people in the U.S. without government meddling – and much more efficiently than HUD.

The problem with Ron Paul is that he is a nut bag combining free market libertarianism with Birch John paranoia and a spotted history of anti-Semitism and racism by some of his connections. Practical libertarians don't put up with the negatives he brings to the table. Period.

That's bullshit. The John Birchers aren't simply paranoids, and Paul certainly isn't anti-Semitic or racist. He's been a politician for decades, so he's had some racist followers and staffers, but he's no racist. These are know-nothing criticisms.

I take the gold nuts to task myself regularly here, but I can go along with 90% of what Ron Paul has to say, which is a hell of a lot more than I can say about McCain or Obama. Paul walks the walk as well as talking the talk, and he's practically the only candidate speaking candidly about U.S. imperialism and the military industrial complex when it matters.

WSJ has a recent editorial on the historical role Frank played in the implosion of Freddie and Fannie.

Did you read it? This article has Frank saying that FNMA and FHLMC are not Federal obligations. I say he was right. Precisely, what does this article assert that he's done to "loosen" lending practices aside from not compelling stricter practices?

What I'm reading is the plan of some would be central planner to order stricter lending criteria. What is he damning? Higher limits on non-conforming loans to allow more loans on pricier properties. Nowhere does this article assert that Frank compelled higher limits. He allowed higher limits, while stating very publicly that taxpayers are not responsible for the derivative securities.

I can understand why libertarians who put pragmatism ahead of principles hate Ron Paul. That said, Ron Paul has stated for the record that pictures of people that adorn his wall are Mises and Rothbard, both of jewish ancestry.

He has stated in interviews early on, to that big hypothetical question of who he would pick for a vice presidential candidate, that he would consider that famous black Economist Walter Williams. Some body who is that racist, atleast involuntarily must have uttered something racist in public. Show me when Ron Paul ever uttered anything racist in Public. Has the media ever record any voice or video of it? Of course we all have heard of the New Letters published in his name and it is a shame that it happened.

Thomas Jefferson owned slaves and so did many of the other founding fathers. Do you feel ashamed of them? I mean being a "practical libertarian"?

As for the JBS you denigrate which I have no affiliation with was founded by Fred Koch the father of Charles Koch. Charles Koch and Murray Rothbard started the Cato institute. Soon after, they became the so called "practical libertarians" after kicking out the principled, JEWISH, atheist, Murray Rothbard. There you have your history lesson.

@Martin: WSJ has a recent editorial on the historical role Frank played in the implosion of Freddie and Fannie.

http://online.wsj.com/article/SB122091796187012529.html?mod=googlenews_wsj

Here are the money paragraphs, which show why GSEs are a horrible idea because politicians eventually realize they can influence them by calling hearings.

In January of last year, Mr. Frank also noted one reason he liked Fannie and Freddie so much: They were subject to his political direction. Contrasting Fan and Fred with private-sector mortgage financers, he noted, "I can ask Fannie Mae and Freddie Mac to show forbearance" in a housing crisis. That is to say, because Fannie and Freddie are political creatures, Mr. Frank believed they would do his bidding.

And this is exactly what Mr. Frank attempted to prove when the housing market started to go south. He encouraged the companies to guarantee more "affordable" mortgages, thus abetting their disastrous plunge into subprime and Alt-A loans. He also pushed for, and got, an increase in the conforming-loan limits to allow Fan and Fred to securitize and guarantee larger mortgages. And he pressured regulators to ease up on their capital requirements — which now means taxpayers will have to make up that capital shortfall.

Here is a speech recorded at the Mortgage Bankers association of 2006
Events are playing so close to his script, that it is scary. But then this guy is well known for his hyperbole. But his analysis is nearly spot on.

Now, there is a person in congress who predicted that Fannie and Freddie will implode. THat was 5 years ago. Here is the transcript

Mises and Hayek wrote about it 4-5 generations ago.

I think the piece you might be missing was the tremendous pressure from government to use flexible loan terms to make home ownership more affordable, especially to minorities.

So I've heard. I want a specific reference to specific legislation creating this "tremendous pressure". What was the pressure exactly? A mortgage broker loses some sort of license to operate if he doesn't write so many mortgages for minorities (or subprime mortgages)? The Treasury guarantees the loans? What?

… loosening credit …

"Loosening credit" doesn't sound like "tremendous pressure" to me.

The government, through the tax code, should not be encouraging people to refinance unsecured debt as secured debt, because when the value of the secured asset rises during a bubble, it encourages people to take one excess unsecured debt.

Agreed. The home mortgage deduction may be the fourth rail, but I'm sure it does more harm than good.

State and local governments need to ease up on zoning and especially regional planning to ensure that an adequate supply of housing keeps prices in check.

By most accounts, my neck of the woods is overbuilt, but zoning could be an issue in some areas. You have to wonder why people expand businesses in areas without adequate housing or at least the potential for it.

We have a lot of unwinding to do. The government, through pressure on the GSEs, should not be encouraging loan terms which, when combined with prices, get people into trouble. The government, through the tax code, should not be encouraging people to refinance unsecured debt as secured debt, because when the value of the secured asset rises during a bubble, it encourages people to take one excess unsecured debt. State and local governments need to ease up on zoning and especially regional planning to ensure that an adequate supply of housing keeps prices in check. And we don't want to lose the gains made in the process of financing a home over the past 20 years.

Arnold thinks that 20% down is what would emerge from a free market.

So Frank has sponsored legislation compelling lenders to make no money down mortgage loans? Or has legislation only permitted FNMA to buy loans with this characteristic? Or does FNMA buy these loans at all? Did Countrywide sell subprime mortgages to FNMA or "securitize" these mortgages itself? Did legislation require or encourage it? What legislation specifically?

I don't know much about this business, but Krugman seemed to say recently (in a column linked here) that FNMA and FHLMC never bought subprime mortgages at all. They only operated on thin margins (buying "prime" mortgages with 20% down) and risked insolvency only because the market for these securities weakened generally as house prices dipped more than 20%. Is that right?

It's either true that "free market" players (Countrywide) were the ones buying lots of subprime mortgages, or it isn't. I'd like to know. Allowing these players fail is the right approach, but I don't know that 20% down is any sort of "market solution". Kling isn't "the market" any more than Henry Paulson is.

The thing about FHA loans, is they were mostly restricted to first time home buyers. When I graduated from college in 2005, I looked at Northern Virginia real estate prices, and my salary (which was exceptional for a new grad… because it was a miserable job), and realized there was no way I could afford to buy. That was a pretty good clue for me that the market was overbought.

The 20% rule isn't a hard and fast rule, but its a good indication of the risk of the market and of the borrower. If a borrower can save the 20% down payment, he more probably has sound income relative to his expenses. On that note, if a buyer can't put up the 20%, perhaps they can't afford the loan, or the home is overpriced, in either case, the lender is at much higher risk.

Of course not…and so please don’t tell me that what we have now, the banks having to put up capital in accordance to what the quite volatile risk kommissars opine, is a free financial market!

Of course a free market would never have bought into the shamefully bad mortgages awarded to the subprime sector.

Please, let the banks be banks again!

I want to see more data and less opinion.

I think you misunderstand Arnold's point. It is BF who wants more regulation. Arnold thinks that 20% down is what would emerge from a free market.