Saturday, December 27, 2008
As I have been stressing lately, the financial crisis is an incredibly complicated matter, and part of the problem is that so many different government policies were involved. Here is another aspect.
What caused the housing boom? Russ Roberts writes:
We have heard a great deal about the first three, but Russ makes a strong case that the tax change was far more important than people have realized.
Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for “fueling the mother of all housing bubbles.”
By favoring real estate, the tax code pushed many Americans to begin thinking of their houses more as an investment than as a place to live. It helped change the national conversation about housing. Not only did real estate look like a can’t-miss investment for much of the last decade, it was also a tax-free one.
The timing seems right on this. Russ has a chart: