The voice of reason vs. the voice of insanity

by Russ Roberts on September 15, 2010

in Government Intervention, Uncategorized

Maybe Edward DeMarco should be polishing his resume. The Washington Post reports:

The federal regulator of mortgage finance giants Fannie Mae and Freddie Mac raised concerns on Tuesday about the Obama administration’s approach toward housing by questioning whether the government should continue to play a significant role in helping borrowers get home loans.

Edward J. DeMarco, acting director of the Federal Housing Finance Agency, became the first major voice within the government to express reservations about the administration’s strategy for revamping the nation’s housing policy.

“Recently there has been a growing call for some form of explicit federal insurance to be a part of the housing finance system of the future,” DeMarco says in prepared testimony, scheduled to be delivered before the House Financial Services Committee. “The potential costs and risks associated with such a framework have not yet been fully explored.”

The article goes on to say:

The mortgage market has been effectively nationalized since September 2008, when the government seized Fannie and Freddie and bailed them out to prevent insolvency. Those two firms and the Federal Housing Administration are now insuring nine in 10 new home loans.

Many administration officials, financial industry executives and academics have said the government should play a smaller but still significant role to ensure that the mortgage market stays healthy and can continue to offer 30-year fixed-rate mortgages to borrowers at affordable interest rates. The role would probably take the form of a government guarantee to investors who put up the money for home loans.

“Without such support, the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale,” Treasury Secretary Timothy F. Geithner said in August. “House price declines could be more acute, with even greater damage to financial wealth and economic security.

Huh? We’re in the middle of the worst economic downturn of our lifetime. Government guarantees contributed mightily to the problem. But we need to continue with the system so we can have milder recessions in the future?

DeMarco doesn’t explicitly endorse or oppose such a role for the government in his testimony, but he outlined several concerns.

First, he rejects the notion that no private firm would risk funding a 30-year mortgage , “at least at any price that most would consider reasonable.” Rather, he asks “whether there is reason to believe that the government will do better? If the government backstop is underpriced, taxpayers eventually may foot the bill again.”

Second, he says he worries that a government guarantee could allow politicians to favor some areas or demographic groups. The government “would likely want a say with regard to the allocation or pricing of mortgage credit for particular groups or geographic areas,” he says.

Finally, he says the guarantee would throw shift capital toward housing, which already benefits from other government support.

Sums it up pretty nicely, doesn’t it?

The article concludes:

Despite these risks, Geithner has argued that there is a strong case for the government to continue guaranteeing mortgages, but with tighter regulations. He has said the government will have to make sure that it can cover potential losses by charging borrowers and banks a high enough fee for the guarantee.

Edward DeMarco has learned something. Tim Geithner has learned nothing.

Geithner wants to re-create the system that collapsed but with “tighter regulations.” He wants to re-create the system that the CBO expects to cost taxpayers $390 billion. He wants to re-create the system that helped destroy the housing market and the financial sector.

Oh, and he wants high fees on banks and borrowers to protect the taxpayer. So he ants a government guarantee to keep rates low at the same time there’d be a fee to make sure the system isn’t too fiscally irresponsible. Madness.

The even more surreal part of this is that DeMarco is the regulator who is saying the system is too dangerous to trust. Geithner says we just need tighter regulations but the chief of the agency doing the regulating thinks it’s a bad idea.

The phrase that gets used all the time is “affordable housing.” But affordable housing isn’t what gets subsidized. What gets subsidized is affordable home ownership. People who rent have housing. They’re not homeless. Why should there be a policy goal of getting everyone to borrow money? So more can paint the walls the color they want and have the htrill of mowing their own lawn?

It was bad enough when we subsidized home ownership in the past. But to persist in these policies in the face of what has happened boggles the mind. Doing the same thing and expecting a different result is a measure of insanity.

Having every American own a home is not the American dream. It’s the dream of the National Association of Home Builders and the National Association of Realtors.

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