"The goal of federal policy should be to eliminate the distortions that make housing unaffordable"

Via Greg Mankiw, Edward Glaeser doesn't like the Fed's GSE infusion either:

"THE GREAT housing cycle of the aughts - the 73 percent increase in housing prices between 2001 and 2006 and the 22 percent decline since then - was built on three illusions. Too many homebuyers thought housing prices would go up forever. Too many investors thought they could lend without risk to subprime borrowers. Too many policy makers thought the magic of subsidized credit could permanently achieve a vote-winning trifecta of bigger homes, rising prices, and more homeownership."

The Illusions ( Which are more like incorrect assumptions or false beliefs. Illusions are things perceived that aren't there, or not as they appear. Maybe this is close to what he means: the state or condition of being deceived; misapprehension. ) are:
1) Housing prices will rise forever ( False )
2) Subprime loans are viable ( False )
3) Subsidies for home ownership are good ( I don't agree with this, but it's a policy decision, not a simple true or false statement )

"The cruel reality of the market has shattered the first two illusions, but somehow the misconception persists that more lending subsidies can take us back to the housing markets of 2006. Yesterday, the Wall Street Journal reported: "The Treasury Department is considering a plan to revitalize the US home market" that "would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5 percent." The plan's core idea violates basic economics and the hard-won wisdom gained over the last two years."

Tell us how.

"America's housing woes are, in part, the legacy of government policies that pushed consumers to borrow and banks to lend. The home mortgage interest deduction encouraged people to make leveraged bets on housing, which looks silly today amidst the wreckage of over-hyped housing markets. Since the New Deal, the federal government has thought that it was a nifty idea to use its borrowing power to encourage home buying through government-sponsored agencies like Fannie Mae and Freddie Mac. The political beauty of such policies was that they subsidized borrowing and buying in a way that could be kept off the balance sheet. For years, policy makers maintained the fiction that Freddie and Fannie didn't cost taxpayers anything."

This is true. The government has encouraged home ownership.

"One of the clearest lessons of the past year is that these lending policies are anything but cheap. To get banks to lend at below-market rates, the government must insure mortgages against default. When those mortgages do default, as they have in droves over the past two years, taxpayers are on the hook. Ordinary taxpayers are currently facing the prospect of paying for the last rash of government-subsidized lending. No one should be thrilled at the idea of a new government guarantee program that makes us liable for billions, or trillions, of dollars of new, bad mortgages."

No one is thrilled. Is he claiming that this is the main cause of the crisis? If so, he agrees with me, although I believe that this part of the government guarantees was much more explicit than the bank bailouts.

"Moreover, any benefits from a new round of subsidized lending are likely to be small. Over the past 25 years, when interest rates fell by 1 percent, housing prices increased by 4.6 percent. If this historical relationship continues to hold, the proposed plan would increase prices by about 5.25 percent. This modest increase would be barely noticeable at the epicenters of the housing bust where prices have fallen by over 30 percent. In many of those areas, like Las Vegas and Phoenix, land is cheap and building is unrestricted, and no credit market intervention in the world will keep housing prices permanently above the costs of supplying homes."

This was my main point. It won't even do much good.

"In fact, the government shouldn't really be in the business of making housing more expensive at all. Price supports are usually a bad idea, because they distort supply decisions and redistribute from buyers to sellers. Why, exactly, should the government be encouraging more overbuilding in Las Vegas? Why, in an age of global warming, should the government subsidize more McMansions? Some economists argue that price supports are needed because prices are below fundamentals, but prices today remain significantly higher than either historical norms or supply costs."

Indeed. But do you also include zoning restrictions as a government policy that raises the price of houses?

"In our new book "Rethinking Federal Housing Policy," Joseph Gyourko and I argue that housing should be more affordable rather than more expensive. We argue that credit subsidies, which artificially inflate prices and encourage over-borrowing, should be gradually reduced rather than increased. We argue that the federal government should lean against the tendency of many communities to block the construction of affordable homes. We also believe that the government should reduce the costs of the foreclosure process and make it easier for mortgage servicers to renegotiate delinquent mortgages."

So, he does seem to include zoning restrictions, etc. He does seem to want to encourage home ownership, only by reducing the price of homes. That's fine with me. I'm also fine with aiding the renegotiating of delinquent mortgages, and believe that a set of agreed upon procedures included in the mortgage would be very useful should the problem of delinquency arise.

"The goal of federal policy should be to eliminate the distortions that make housing unaffordable, not to bribe people to borrow and build."

Sounds good.