Jon Elswick/AP Photo
New homes under construction, May 15, 2021, in Frederick, Maryland
I was content to sit out the Abundance™ deliberations. Two years ago, I wrote a long piece about the ways in which adherents to the new paradigm of “a liberalism that builds” neglected any analysis of power, or the need to build coalitions to counteract that power. Ezra Klein engaged with my argument in his New York Times column and I responded. As a journal on the left, we were, I believe, contractually obligated to review Klein and Derek Thompson’s Abundance book, and we did so. But I personally felt like I said what I wanted to say. (As an aside, I was amused that when the authors saw fit to mention the Prospect in Abundance, they didn’t discuss the aforementioned back-and-forth at all, but instead briefly referenced a Bob Kuttner blog post about the back-and-forth.)
However, I got a call last week from an NPR program called Open to Debate. They were having Derek Thompson on to talk about his book and wanted me to join. The show has an unusual format: There’s a 40-minute interview between the subject and a moderator, then a few panelists are brought on to ask one question. I’m not sure this constitutes debate, but I took advantage of the opportunity nonetheless.
Here was my one question: “In 2006, over 2 million units of housing were built, and after that we entered the biggest depression in modern homebuilding history. Single-family homes didn’t rebound in construction for more than a decade, and multifamily, which wasn’t really involved in the bubble, didn’t recover for five years. I know you don’t believe that there were no zoning rules in 2006, and after 2006 there was a swarm of them. What happened was we had a housing bubble collapse, brought on by deregulating housing finance, which was spurred by an abundance agenda known as George W. Bush’s ‘ownership society.’ How does that factor into your analysis? What lessons should we draw from what happened in the recent past when abundance was prioritized over regulatory slowness or regulatory safeguards, even ones that on the surface have little to do with building, and the results were disastrous?”
Thompson replied that the question was partially fair and partially unfair. He agreed that the housing market is more complicated than local building rules, which was a pretty wild concession given how that’s kind of the entire book. But, he said, he never called for lax lending standards, and he “would not characterize the trigger of the Great Recession as an abundance agenda as we would define it.”
I responded, much to the chagrin of the show producers who wanted to keep things moving, that Thompson’s ends matched George W. Bush’s: They both wanted more people to afford housing. What, I asked, if that common goal is distorted in ways that cause serious dislocations? Again, Thompson conceded a big bite of the argument. “Could we see deregulation in various markets leading to outcomes that are undesirable? Yes.” But he said that housing was so unaffordable today that we have to try something, and we should not be afraid of “allowing markets to flourish” just because we had a housing-fueled Great Recession.
So now I think I have to sharpen my point, and get pulled into this debate. Because what caused the financial crisis is actually, I think, critical for understanding the dividing lines between adherents of abundance and their critics.
IN A SENSE, MY SHORTHAND was unfair to Bush, because his particular abundance agenda of making housing affordable has a longer history. It starts in the late 1970s, when Wall Street saw $1.5 trillion sloshing around in the residential housing market and decided it wanted in on the action.
At that time, capital for mortgage lending flowed through government-sponsored entities Fannie Mae and Freddie Mac, which bought and pooled mortgages that conformed to high standards into bonds, and sold them to investors. Because of the implicit (and in some cases explicit) government backing, the bonds were very low-risk, investors happily bought them, and Fannie and Freddie used that money to buy more mortgages, facilitating lending.
Indeed, these bonds were so popular that demand exceeded supply, because of government regulations preventing banks from creating their own “private label” mortgage securities. So bankers got the rules changed. The Secondary Mortgage Market Enhancement Act (1984) eliminated the ban on private banks selling mortgage-backed securities without a government guarantee, and preempted state restrictions on the practice. Banks began gradually to take the leftover, sketchier subprime mortgages Fannie and Freddie wouldn’t touch, pool them into a tradable instrument, and structure them to make them look safe to investors. Several other laws throughout the 1980s and 1990s facilitated this.
No zoning law or agglomeration of zoning laws has had the impact on housing construction that the collapse of the housing bubble did.
Lew Ranieri, who ran the trading desk at Salomon Brothers and invented this new kind of mortgage-backed security, was instrumental in the lobbying effort to legalize it. And he sold it as a form of abundance. As recounted by Salomon trader Robert Dall in Michael Lewis’s Liar’s Poker, “Lewie had this spiel about building homes for America … When we’d come out of those meetings, I’d say, ‘C’mon, you don’t think anyone believes that crap, do you?’”
But the sales pitch worked, as evidenced by the powerful political figures who would echo it. In 1995, Bill Clinton proposed a 67.5 percent homeownership rate by 2000, suggesting that “when we boost the number of homeowners in our country, we strengthen our economy, create jobs, build up the middle class, and build better citizens.” George W. Bush framed the ownership society as one in which people wouldn’t have to rely on government. “More Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property,” Bush said in a speech in 2004.
For a minute, this worked. There were more homes built in California than in Texas in 2005. California was one of the four “sand states” where subprime lending took off; the other three were Arizona, Nevada, and Florida. There was so much demand from the securitization machine for more loans to put into private mortgage bonds that lending standards disappeared, fraud ran rampant through origination, appraisal, and every other step of the process, and building surged. Half of the loans originated in America in 2006 were subprime, many of them given to people who could have qualified for prime loans.
Then things rather famously went awry.
THROUGHOUT THIS PERIOD, the deregulation of mortgage finance was justified and sold as a means to make housing affordable and give everyone a slice of the American dream. The way in which that process was supposed to manifest was just as obscure and technical as zoning laws and mandatory parking minimums. It involved allowing Wall Street to dominate how housing got built and mortgages got sold. Unbounded by rules to protect borrowers and the financial system, it eventually imploded.
It is important to be clear on this. No zoning law or agglomeration of zoning laws has had the impact on housing construction that the collapse of the housing bubble did. We built fewer homes each year from 2008 to 2014 than in the worst year for home construction in history to that point. A normal level of construction outside of recessions wasn’t reached until 2020, and COVID and rising interest rates put an end to that. Hundreds of thousands of construction workers lost jobs; thousands of construction businesses went bankrupt. It was a deeply scarring event.
Abundance rather cleverly writes around this, at one point describing the shift in California homebuilding “since 2007” without describing the bubble in 2006. The housing bubble and collapse isn’t mentioned in the chapter on housing, deferred to an afterthought in a subsequent chapter.
Klein and Thompson describe their book as a “lens not a list.” They aren’t comfortable with defining specifically what should be done, but instead want to raise new questions about how to look at politics. They ask, “what is scarce that should be abundant?” In the ’80s and ’90s, bankers and presidents answered that question with the words “affordable homeownership.” That was the lens, and deregulating finance was the list. A bunch of constricting rules were shackling the ability of people to own a home, and those rules were systematically bulldozed, to the great pain and continued suffering of everyone struggling to afford housing today.
In fact, it was superficially reasonable to turn to finance to solve an affordability crisis. Structured finance is the kind of thing we actually do build in America. We hollowed out our industrial base and lost the knowledge that makes production efficient. We deliberately switched to a service economy, and chose financial assets and intellectual property as the building blocks of that economy. For years, we have seen proponents of a renewed industrial policy seeking to make more things in America, and financiers saying no, because that would reduce profits. When Thompson said during the debate that his book has nothing to say about financing of homes, I’d say that’s precisely the point.
Because financiers have power in our country, their solution to solve the affordable-housing problem through financial engineering was privileged. It was a path of least resistance to housing abundance. Thompson may not think this is part of his current movement, but he would be wrong. We published an entire story from Paul Williams on his unique method for finding financing for permitted projects that have no capital to draw from. That’s an example of putting finance to productive ends. On the other hand, the prominent abundance think tank called the Niskanen Center has said directly that “well-meaning regulations of housing finance have made it harder to build starter homes throughout the country,” which is an open call to weaken lending standards.
In short, the idea that the securitization machines that ravaged this country won’t be turned back on in the name of abundance doesn’t seem true, especially because, as Thompson conceded, financing is a really important element of building housing.
I had a lot of problems with the Abundance book. I thought it was sloppy to recycle a two-year-old Klein column about alleged impediments to federal semiconductor manufacturing grants without mentioning that all the money was taken and the plants are operating. I thought it was maddening to use California’s high-speed rail program as a signature example of Democratic dysfunction when it was a Republican governor, Arnold Schwarzenegger, who made the decisions while in charge of the state’s high-speed rail authority at the key moment in 2008 to decrease state capacity and outsource to consultants. I thought it was deceptive to celebrate Bell Labs as a spur for invention without mentioning that it sat on most of those inventions, until a Justice Department consent decree forced the AT&T monopoly to license them out, an action that created Silicon Valley. And I thought it was reductive to blame Democrats for complicating the broadband build-out when it was the product of Republican senators and the telecom industry wanting to bog down the process.
But let’s focus on where we agree. Abundance comes out of a frustration that Democrats promise to make the lives of their constituents better and then fail to deliver. Klein has said precisely this in media appearances. This was the point of my 2021 warning making the case for deliverism, on the grounds that failing to deliver will toxify the Democratic brand. The brand is now indeed toxic, and it’s reasonable to ask why things can’t get done.
The Klein-Thompson view is that Democrats clogged the building channel with unnecessary or just burdensome rules. My view is that powerful forces profit off choke points and want them to remain. Joe Weisenthal had a particularly insightful explanation of this dynamic, noting that “any impulse to abundantly build out less profitable lines of business undoubtedly strikes at the heart of how American capitalism works.” Even in housing this is true, as homebuilder cartels have been building less and making more money by hoarding land.
These viewpoints can be complementary, but only with open eyes. If we want to build to productive ends, building power to take down finance and monopoly is the best way to make that happen. The Biden administration’s attempt to do that was uneven and too neglectful of the short term, but directionally correct.
Substituting that with a lens that simply preferences action is dangerous, precisely because what we call deregulation really just shifts regulation (that is, the rules of how markets operate) from government to private hands. During the housing bubble, bankers structured the market to their own ends, and it resulted in catastrophe. “I wasn’t out to invent the biggest floating craps game of all time, but that’s what happened,” Lew Ranieri said when it was all over. If you ignore Wall Street’s role in the economy, you will get more floating craps games, and you won’t build much, either.
