Paul Krugman points to this clear explanation by Alyssa Katz why Texas has escaped the worst of the housing crisis: tight regulation prohibiting cash-out mortgage refinancing and imposing a strict 80% maximum mortgage.
The reason isn´t a secret Austin cabal of Keynesian technocrats, but history:
The roots of this fierce resistance to debt’s temptations go deep in Texas history. Seven years before the republic joined the union in 1845, a bank panic and resulting foreclosures lost many homesteaders their property. Drawing from Mexican codes protecting landholders—much beloved by flocks of U.S. debtors who had taken refuge from creditors by relocating to Texas homesteads—the new constitution of the state of Texas forbade lenders from peddling mortgages to homesteaders.
Italics mine.
So regulation is OK as long as it´s based on paternalistic Hispanic codes to protect the landed aristocracy. (I suspect, but can´t prove, a distant origin in the laws of old Castile, when borrowers would have been Old Christians and lenders conversos.) The Salamanca school of theologian-jurists produced an advanced theory of interest – time preference and all – in the 17th century, bypassing the knee-jerk Biblical ban on usury, so Spanish kings and viceroys had access to pretty good policy analysis if they wanted it.
For another counter-intuitive example of enlightened strong-government Texas policy, see the renewable electricity market.
The Texas regulations are presumably constitutional. Nothing stops California or Massachusetts from copying them.
I’m trying to figure out where the socialism comes in here.
Most of the people I’ve heard pushing for “just require higher down-payments and you don’t have this problem” have been conservatives, not social democrats or technocrats.
And note that if the GSE’s refused to insure or issue anything with a down-payment of less than x% (where x<10) those mortgages would be a much smaller proporttion of the market. That's a federal, not a state, possibility.
“So regulation is OK as long as it´s based on paternalistic Hispanic codes to protect the landed aristocracy. (I suspect, but can´t prove, a distant origin in the laws of old Castile, when borrowers would have been old Christians and lenders conversos.)” Nobody expects the Spanish Inquisition. See here: http://www.youtube.com/watch?v=uprjmoSMJ-o
“I’m trying to figure out where the socialism comes in here.”
It’s socialism in the sense that all laws that restrict what businesses can do are, in America, called socialist.
And this is obviously a law restricting what businesses can do.
Well, it’s an odd-man-out socialist policy, in that then-President Bush pushed for it, and Chris Dodd and Barney Frank succeeded in blocking it.
Some history of the homestead exemption in TX:
http://www.historycooperative.org/journals/lhr/24.2/pdf/morantz_lhr.24.2.pdf
http://www.jstor.org/pss/30234694
http://www.jstor.org/pss/30240739
http://www.tshaonline.org/handbook/online/articles/mlh02
I recall that it was very popular with otherwise-conservative Texans, esp. of generations that lived through the Great Depression. They wouldn’t have used the word “socialist,” but they were aware that it wasn’t exactly congruent with their other ideological attachments. In the mid-20th century the preferred term was “populist.”
I confess I am using socialism in Maynard Handley’s ironic sense. This sort of prudential regulation would be very pale pink social-democratic in Europe, and entirelyconsistent with paternalist “Christian democracy” as well.
Populism accounts for the mechanism, but does it explain the ideas? The housing bubble and the policies behind it can also be (cynically) described as populist: a house and a mortgage for everybody! You have to account for the Texas exception. Thanks K for the historical links. BTW, there’s a village called Wimberley in the Texas hill country – I hope to visit it some day.
The story suggests that there are still political attitudes in conservative America that could still be tapped, as FDR managed, against the financial plutocracy of Wall Street. Frank and Dodd have certainly been part of the problem; it’s fitting that the Janus-faced financial reform act bears their names.
If I remember correctly, the 1845 Texas Constitution just plain old prohibited banking. Which might not be a bad idea today, considering what “banking” now means.
SamChevre,
Most of the people I’ve heard pushing for “just require higher down-payments and you don’t have this problem” have been conservatives, not social democrats or technocrats.
But how many of these conservatives would support an actual regulation requiring 20% as a minimum down payment? About the same as the number of liberals who would, I suspect.
Socialism for me but not for thee?
On the other hand, the texas commercial real estate market was famous during the late 80s for its innovations, including the one of lending “developers” not only all the up-front costs for a loan but also the first several years of interest payments, all of which could be reported as income by the lender, and the loan marked as performing until the free money ran out. Socialism of another kind.