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Outlook: A Too-Wonderful Lifestyle
Cheap Oil, Easy Credit for Poor Built Unsustainable Dream

Ross Douthat
Co-Author, "Grand New Party: How Republicans Can Win the Working Class and Save the American Dream"
Monday, October 13, 2008 10:00 AM

"For three generations, suburban homesteading has been underwritten by our infrastructure spending, our zoning policies, our banking regulations and our tax code. Easy credit, inexpensive mortgages, cheap gasoline, wide-open highways, the heavy hand of federal regulators on any bank that declined to lend in low-income or minority neighborhoods -- if it made homeownership cheap and suburbia accessible, Americans were for it, never mind what the critics said. ... Until 2008, that is, which may be remembered as the year when the American Dream's excesses -- from gas-guzzling SUVs to subprime mortgages -- suddenly threatened to strangle the dream itself. This summer and fall, George Bailey's vision has endured a stunning one-two punch."

The Atlantic senior editor Ross Douthat, co-author of "Grand New Party: How Republicans Can Win the Working Class and Save the American Dream" was online Monday, Oct. 13, 10 a.m. ET to discuss his Outlook piece on the causes and effects of the housing market collapse and subsequent credit crunch.

The transcript follows.

Archive: Transcripts of discussions with Outlook article authors

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Ross Douthat: Good morning, and thanks so much for joining me. I'll be here for the next hour, chatting about George Bailey's influence (or lack thereof) on the housing bubble and the economic crisis that's followed.

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Philadelphia: I'm not quite sure what part of "It's a Wonderful Life" you're relying on to conjure your ridiculous theme. Bailey Building and Loan had a problem because ditzy Uncle Whozit lost the day's deposit, and Potter found it and dishonestly held it back. There's nothing in the movie about overlending to the undeserving. Similar historical errors abound in what is one of the stupidest pieces I've seen in The Post in a while (and that is saying something, given that you have Broder on staff).

Ross Douthat: Tough stuff, Philadelphia! My point wasn't that lending the undeserving ruined the Bailey Building and Loan -- that was Uncle Harry's doing, as you say, with an assist from Mr. Potter. But if you rewatch the movie again (and it's always worth rewatching) you'll see that Bailey's whole business model was premised on lending to would-be homeowners who couldn't get a loan from Potter, because they couldn't afford to buy their homes outright -- and that the arguments Bailey marshals in favor of putting the working class in their own homes are similar to the arguments politicians have marshaled ever since. And I think this is a good idea, in general; it just was taken a little bit too far in the last decade. The point of the piece isn't that George Bailey was a bad businessman -- it's that his heirs, in the private sector and government alike, took his ideas a little bit too far

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Odenton, Md.: Are you kidding? George Bailey wanted the working people in his town to live in safe, clean houses. Nothing over-the-top, just small houses in which to raise their kids. He even says "Two bedrooms and a bath." What got us into the mess we are in today is the greed-fueled idea that everybody should be able to live like a millionaire even if they can't foot the bill. People who make barely more than minimum wage were getting mortgages on McMansions when they didn't make enough in a month to cover the bill. The average guy thought he was entitled to five bedrooms, a pool, a plasma TV and whatever else set his heart aflutter. Apples vs. oranges.

Ross Douthat: Odenton, see my previous post. I largely agree with you: The problem isn't what Bailey himself was doing, it's the way his idea (that everyone should have the chance to own a home in the suburbs) has intersected with increasingly-unrealistic visions of what a home in the suburbs should look like, cost, etc. That's why I concluded with the hope that we can dial down the excesses while keeping the core of his vision intact.

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Silver Spring, Md.: We must preserve the small-scale communities we have now! Light rail seems associated with massive high-rises. A Maryland bill became law in the spring (HB373/SB 204) that would extend state transit-oriented development zoning to a half-mile from a transit station. I fear it will overwhelm the local limit, ranging from 800 feet to a quarter-mile. Small homes with porches and small yards with big trees are threatened. And when did population stability become a taboo topic? Big houses, big high-rises -- both are unsustainable, and so are big population increases.

Ross Douthat: Silver Spring, the problem with "population stability" is that it turns into stagnation and decline very quickly. Historically, economic growth and population growth have gone hand in hand, and what's more, the entire structure of the modern welfare state -- meaning Medicare and Social Security in the U.S. -- depends to a large extent on a succession of large and prosperous younger generations to pay for the ever-larger populations of retirees. The U.S. is in better shape than our competitors -- better than Europe, and especially than places like Japan and China, which are growing old before they've grown rich enough to support a large population of retirees -- precisely because our birthrate is higher, and our population is growing slowly but reasonably steadily. And that means we need to find a way to balance your admirable desire to preserve small-scale communities against the need to provide opportunities for upward mobility (and yes, suburban housing!) to today's younger generation.

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Brisbane, Australia: Home ownership rates in Canada, the US and Australia are very similar, varying between 65 percent and 70 percent. Australia might even have the highest rate of the three, with the backyard barbie and Hills Hoist clothesline having the status of cultural icons. To attribute American exceptionalism and the special blessings that God apparently has bestowed on America to the house in the suburbs is oversimplifying things a bit.

Ross Douthat: That's an excellent point, Brisbane, and you're right: I was oversimplifying a bit. Clearly, part of the picture here is just the fact that frontier societies with, large, unsettled interiors tend to be more conductive to homeowning than older, crowded societies (i.e. Europe) that urbanized during an aristocratic era rather than a democratic one. That said, I think the ideal of homeownership interacts in profound ways with other aspects of American exceptionalism -- our resistance to government regulation and taxation (the great tax revolts of the 1970s that helped bring the Reagan GOP to power revolved, in most cases, around property taxes) chief among them.

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La Jolla, Calif.: Would like your comment as to whether you believe we are in store for a real reduction in our standard of living as a result of this breakdown, and whether you think there are any positives that might come from that? See The Europeanization of America. Thanks.

Ross Douthat: It isn't hard to imagine positive results over the long term. As Fareed Zakaria notes elsewhere on the site, it wouldn't be the worst thing in the world for Americans and their elected representatives to learn to live within their means to a greater extent. The recent economic expansion was floated on massive borrowing, private and public: That couldn't last, and better that it ends now, I suppose, than with a more massive crash five years hence. Moreover, rising real estate prices have a negative impact on social mobility, because they benefit the already-wealthy and make it tough for the upwardly mobile working class to break into the housing market. Michael Bloomberg recently referred to life in New York as a "luxury good," and that's true up and down the Eastern Seaboard and the West Coast: If the current downturn makes life the centers of economic activity more affordable, that's probably a good thing.

All of that said, one should be wary of the argument that says that falling standards of living are good for us, because they'll teach us virtue in the long run. Sometimes economic contractions have that effect, but just as often they breed xenophobia, demagoguery and political polarization -- and we have enough of the latter at the moment. (Benjamin Friedman's "The Moral Consequences of Economic Growth" is a good book to read on this subject.)

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Re: "Increasingly-unrealistic visions of what a home in the suburbs should look like": Isn't this similar to the argument that people make to say that people making $250,000 a year aren't rich? Because in several places in the country that just barely lets them afford a huge house and private school for the kids? My friends make this argument themselves, which I chuckle at inside because I know they've got several thousand dollars invested in purses in their closets.

Ross Douthat: You make a good point. The only thing to be said in defense of that argument is that home prices really do vary wildly around the country, and while $250,000 a year makes you rich, to some extent, almost anywhere, it makes you a lot richer in, say, suburban Indiana than in suburban Virginia. There's a recent study showing that half of financial advantage that college graduates enjoy over non-graduates gets eaten up by the cost of living in the kind of cities where college graduates tend to congregate.

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Anonymous: It is reassuring to read your strong advocacy of homeownership. For decades, homeownership has been considered the cornerstone of the American dream and the first step towards the creation of wealth. As Douthat attests, homeownership is uniquely precious in American life, offering its citizens equality rooted in ownership, citizenship rooted in self-sufficiency, and economic security.

Does homeownership make Americans better citizens? Yes, I certainly agree. Housing studies have concluded that children who live in homes owned by their families are more likely to achieve higher levels of educational attainment and earnings, and have a lower incidence of teen pregnancy and welfare dependence. Additional benefits of homeownership include better maintenance of homes, greater neighborhood stability, and increased civic involvement.

Does homeownership make Americans better customers? Yes, I most certainly agree. Homeownership fuels economic growth, creates jobs in construction, increases sales in home-improvement goods and services, and can build equity for home buyers. Once homeownership is financed properly, prudently and transparently, it will revitalize the economy and help a greater number of Americans achieve a better living standard, a greater sense of safety and security, and improved educational and economic statuses.

Ross Douthat: Agreed, agreed, agreed ... but that doesn't mean that people should buy homes if they barely can put any money down! (Or more importantly, that Wall Street should place large bets on those same people's ability to make their mortgage payments.) Homeownership is a wonderful thing, but so is prudence.

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Chicago: So act more like Mr. Potter and less like George Bailey? I don't know, Mr. Douthat -- what would Clarence say?

Ross Douthat: Well, he might quote Jesus Christ himself! For instance: "Behold, I am sending you out as sheep in the midst of wolves, so be wise as serpents and innocent as doves." Or: "For the children of this world are in their generation wiser than the children of light." Yes, in "It's a Wonderful Life" Bailey was right and Potter was wrong, and Clarence never would tell George to become like Potter. But that doesn't mean there wasn't a grain of hard truth to Potter's worldview -- the wisdom of serpents, if you will -- that the Baileys of today would do well to remember.

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Cabin John, Md.: Since you obviously have a keen historical sense about politics, here's a slightly off-topic question for you: Has there ever been as big an October Surprise as this year? Has there ever been as big an event during the October of an election year as this year's all-time record drop in the stock market? A declaration of war, natural disaster, whatever?

Ross Douthat: Well, it wasn't a "surprise" exactly, but Sherman's capture of Atlanta in August-September 1864 turned the Lincoln-McClellan election from a nail-biter into a blowout. And judging by the shift in the polls in the past few weeks, if the 2008 election were held today, I think that the current crisis would be remembered as having a similar impact. (That said, there are still three weeks of campaigning left to go...)

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Sun Prairie, Wis.: Good morning, Mr. Douthat. Would you agree that part of living "within our means" as a society has to be a more realistic attitude about the number and size of tax cuts we can afford? Ordinary taxpayers under any kind of financial stress naturally are going to want their own taxes to be lower. The incumbent administration made lowering taxes for its campaign contributors its signature domestic policy initiative as soon as it took office. But we're facing massive current budget deficits, very large pension and health care costs in the near future, and two wars to pay for -- and both presidential candidates are assuring Americans that their taxes will go down. Does this make sense to you?

Ross Douthat: I would put it this way: For the past 30 years, when Republicans have talked about reforming our tax system, they've usually called for cutting everyone's taxes -- rich, poor and middle-class alike. This has been a winning message for a long time, but the budgetary realities you describe mean that it probably is not going to be a plausible message in the immediate future. Going forward, the tax debate probably will focus less on whether we should have across-the-board tax cuts, and more on where exactly the tax burden should fall. And on the evidence of this election cycle, Republicans have a lot of work ahead figuring out a plausible and sellable message on taxes that doesn't just promise to expand the deficit beyond what we're already facing. (If you're interested in my ideas on this front, I'll plug my recent book -- "Grand New Party" -- which is filled with harebrained policy suggestions...)

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Springfield, Va.: I agree with both you and Odenton regarding the intersection of George Bailey's dream and excesses. Unfortunately, the great majority of generations X, Y and the Millenials see post-war neighborhoods in and around the Beltway as woefully below their standards, and will settle for nothing less than a McMansion. I think you are hoping against hope that these people will change their minds and standards. Do you see a scenario, though, where they really will be forced to?

Ross Douthat: Well, we'll see. Obviously a recession will have some impact, and so will the fact that for the foreseeable future, houses no longer will be regarded as the equivalent of 401(k)s -- places to stow your money and watch it grow. I suspect that just as rising gas prices spur people to trade in their SUVs for, say, Honda Civics, a tougher mortgage market will spur people to trade in their McMansions for houses that George Bailey would recognize. But (and this goes to another question I've left unanswered, about the American sense of entitlement) obviously some of this has do with the weight of cultural expectations, and we won't know that things have really changed until we turn on, say, the house porn on HGTV, and the camera no longer is lingering on absurd great rooms and Jacuzzi-stuffed bathrooms.

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Richmond, Va.: So The Atlantic had a great article several months ago about how the exurbs of today will be the slums of tomorrow. Has this recent crisis sped up this process (assuming you accept the premise that exurbs will be slums in the future) or is this process independent of market conditions? And what about crime? Will it follow the poor out to the exurbs, or stay in the more densely populated areas? I'm personally fascinated by the idea of those gargantuan McMansions being split up and turned into duplexes and triplexes. What a sight that will be!

Ross Douthat: I think it all depends on how deep the current contraction is. Even before the current crisis, you already could see crime spreading out into inner-ring suburbs, as downtown gentries and housing projects were broken up. (The Atlantic had an article by Hanna Rosin on this topic a couple months ago that's well worth your time.) My own suspicion is that the most implausible exurban developments will turn into ghost towns before they turn into ghettos, because the poor rely on mass transit options, as a rule, that just aren't available in areas that were built for people who commute long distances by car. But I guess we'll find out.

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York, Pa.: Mr. Douthat, your Sunday Washington Post article didn't mention credit default swaps at all. If banks had used them properly, they would have protected us against the percentage of mortgages that all the banks knew would fail eventually. But they weren't done right. The market for credit default swaps grew to $65 trillion vs. the $6 trillion housing market, good loans and bad. When the housing bubble burst, this swap-to-mortgage ratio caused several banking titans to fail below their required 10 percent in reserves.

They failed, we bailed. The giant banks should have known better. It's finance 101 to put aside reserves to cover expected failures in a mortgage portfolio. We've had big downturns and high mortgage defaults before, but nothing like this. Why have you blamed this excess more on the middle class and less on the financial titans, who were supposed to have known better? It sounds like you are claiming that pressure was put on the banking titans to take on these loans. You can't put pressure on giant financial institutions -- they're cold-blooded. They move in the way that will make them the most money. They thought they had themselves covered with credit-default swaps, and look how wrong they were.

Ross Douthat: York, you're absolutely right: The housing bubble, and the unrealistic expectations that created it, is only one factor in the current crisis, and bad decision-making on Wall Street bears as much of the blame as overly-optimistic Baileyism on Main Street.

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Ross Douthat: Thanks to everyone for the conversation -- it has been great chatting, and I'm sorry if my long-windedness prevented me from getting to your questions! Now I'm off to hone my George Bailey impression.

("Merry Christmas, Bedford Falls! Merry Christmas, you wonderful old Building and Loan!")

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