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Bill Clinton and the Housing Bubble

ourlot.jpgCommenter Fallsmeadjc makes a fair point. Bill Clinton might have left office before the worst of the financial sector's excesses. But he wasn't blameless in hyping the housing bubble:

In 1997 Congress made the first $500,000 of capital gains on the sale of a home tax-free for a married couple and $250,000 tax-free for a single person. This gave real estate a distinct advantage over other capital investments and distorted investment decisions from that time on. I'm sure you could find a graph that would show the beginnings of the housing bubble in 1997. I'm not blaming the entire crisis on this tax change or on the Clinton Administration but it definitely constituted a significant Governmental puff into the housing bubble.

This wasn't only Clinton, of course. Ceaselessly pushing homeownership has been a bipartisan preoccupation in America. For readers who want a fuller picture of this, I'd recommend Alyssa Katz's forthcoming book, Our Lot: How Real Estate Came to Own Us. In fact, her book is so good on this point that I e-mailed to ask her thoughts. She wrote:

Clinton's mea culpa on derivatives deregulation is welcome, and I don't think he's wrong that the left has placed undue blame on Glass-Steagal repeal. The Gramm-Leach-Bliley Act was not a primary cause of our current economic miseries.

But on [the Community Reinvestment Act], Clinton conveniently brings onstage and then demolishes the straw man conjured by the right: that CRA required banks to lend to non-credit worthy customers (it doesn't) without copping to what his administration actually did do, which was to set ludicrously high quotas on Fannie Mae and Freddie Mac's obligations to buy mortgages made to low-income people or securities based on such mortgages. From that point on, the explosive growth of subprime lending and the Wall Street mortgage-backed securities market became inevitable.

By Ezra Klein  |  May 28, 2009; 4:00 PM ET
Categories:  Economic Policy  
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This provision replaced a previous one which excluded gains so long as a replacement house costing more was purchased. Only the last home sold (without being replaced) was taxed. If not sold prior to death it was never subject to income tax. It isn't clear to me which provision is more advantageous.

Posted by: original_hewald | May 28, 2009 4:17 PM | Report abuse

Capital gains income is taxed far too little. All that encouragement of the capital formation has sent too much capital chasing itself around the stratosphere, completely divorced from any real-world productive activity. The result is predictable: massive inflation of financial "products" that causes one bubble after another.

The solution is to tax capital gains the same rate as every other kind of income. With realigned incentives, investors would quickly rediscover the virtues of productive enterprises that provide jobs and create real wealth.

Posted by: Aatos | May 29, 2009 3:41 AM | Report abuse

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