Excerpted From Today's Barron's:
"REMEMBER LAWRENCE LINDSEY
, the former Bush economic guru who was bounced from his job in December 2002, in part for being more honest than politic?
Lindsey publicly predicted that the Iraq war would cost at least $200 billion at a time when the president wasn't even acknowledging that there would be a war. The invasion was launched in March 2003. Since then, the U.S. has spent more than $440 billion on the conflict.
Because of Lindsey's reputation for prescience, we revisited a speech on the housing market that he delivered in April to fellow economists. In it, he said: "Short of the war on terrorism, this is by far the greatest risk posed to the American economy and our way of life."
The problem isn't just that house prices appear to be in a sustained decline. Congress and the regulators are reacting in knee-jerk fashion to avenge first-time home buyers facing foreclosure. That's scaring already panicked lenders into tightening credit even more.
Congress, which Lindsey argues helped create the bubble by increasing access to homeownership through the Community Reinvestment Act, now, through hearings and the threat legislation directed at the mortgage business, is reducing the supply of financing to first-time buyers. Lindsey said it's similar to what bankers called the "regulatory reign of terror" that caused real-estate collapses in Texas, Colorado, California and New England in the late 1980s. "In 1991, spending on residential construction amounted to just 3.4% of GDP, down from a peak of 5.0 in 1987," Lindsey recalled.
This time, he predicted, the cycle will be exacerbated because losses on mortgage securities will be higher than anticipated, causing buyers of these instruments to pull back from the market. Legal risks posed by trial lawyers representing "innocent victims" will make it even worse, he said. "Given the widespread standard of joint and several liability, the one who will pay the punitive damages will not be the original issuer -- who may be bankrupt by that time -- but the buyer of that paper," Lindsey asserted.
He would have President Bush, Congress and the Federal Reserve take steps that would assure investors that they won't be sued for simply investing."
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