Commentary Magazine


Housing Collapse Has a Lesson for the Ages

Earlier this month the New York Times ran a feature on the newest discipline to come to college campuses: capitalism. Major universities in the United States are now going to start devoting some class time to learning about it. Which is another way of saying they will learn about America.

Conservatives often complain that liberals talk about conservatism as if they’ve only heard vague rumors about this bizarre species, mostly because it’s easy to avoid conservative opinion if you want to. But they’ll also justly complain that major liberal institutions, like the mainstream media and universities, don’t understand capitalism, and don’t seem to want to. Yet these institutions shape young minds.

There are many choice quotes in the Times article about the sudden interest their own country, but this one stands out:

While most scholars in the field reject the purely oppositional stance of earlier Marxist history, they also take a distinctly critical view of neoclassical economics, with its tidy mathematical models and crisp axioms about rational actors.

That about sums it up. They may not like the “purely oppositional” (read: given to mass murder) nature of Marxist history, but they don’t like the rationality of capitalism either. They have now designed the perfect course for those students who have an interest in economics but don’t like numbers or genocide.

But one thing conservatives have been known to repeat ad nauseam about capitalism is that it is truly race-blind. In a market economy, the basic trade principle of mutual benefit based on rational self-interest dominates. And attempts to distort the market in favor of one racial or ethnic group can end up helping that group marginally in the near term while hurting that group in the long term. On that note, those college professors just starting to explore capitalism might want to take a look at today’s New York Times report on the housing bust and the recession:

The Urban Institute study found that the racial wealth gap yawned during the recession, even as the income gap between white Americans and nonwhite Americans remained stable. As of 2010, white families, on average, earned about $2 for every $1 that black and Hispanic families earned, a ratio that has remained roughly constant for the last 30 years. But when it comes to wealth — as measured by assets, like cash savings, homes and retirement accounts, minus debts, like mortgages and credit card balances — white families have far outpaced black and Hispanic ones. Before the recession, non-Hispanic white families, on average, were about four times as wealthy as nonwhite families, according to the Urban Institute’s analysis of Federal Reserve data. By 2010, whites were about six times as wealthy….

Many experts consider the wealth gap to be more pernicious than the income gap, as it perpetuates from generation to generation and has a powerful effect on economic security and mobility. Young black people are much less likely than young white people to receive a large sum from their parents or other relatives to pay for college, start a business or make a down payment on a home, for instance. That, in turn, makes their wealth-building prospects shakier as they move into adulthood.

The Times explains why minorities are suffering more during the current economic downturn:

Two major factors helped to widen this wealth gap in recent years. The first is that the housing downturn hit black and Hispanic households harder than it hit white households, in aggregate. Many young Hispanic families, for instance, bought homes as the housing bubble was inflating and reaching its peak, leaving them saddled with heavy debt burdens as house prices plunged in places like suburban Phoenix and inland California.

Black families also were hit disproportionately by the housing collapse, because heading into the recession housing constituted a higher proportion of their wealth than for white families, leaving them more exposed when the market crashed. Higher unemployment rates and lower incomes among blacks left them less able to keep paying their mortgages and more likely to lose their homes, experts said.

And the housing bubble and bust were brought about in part by well-intentioned presidents from both parties trying to expand home ownership. But George W. Bush’s attempts to rein in the lending practices of the government-sponsored lenders and improve federal oversight were stymied, most effectively by Massachusetts Democrat Barney Frank.

That housing slump will forever be a major part of Frank’s legacy. And as the Times story notes, the widening of the wealth gap, especially during a down economy with high unemployment, can have lasting effects by constricting the generational transfer of wealth and enabling the wealth gap to persist or widen further even as the economy recovers.

Of course, leftist ideologues would love for this to be a tale of rapacious capitalists bent on profiting by stealing the wealth of minorities. The reality is that the government was only trying to help, and ended up doing lasting damage. It’s a familiar story with an important lesson that American academia’s newly minted professors of capitalism will have a hard time avoiding.

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