Taxpayers would no longer be on the line for subsidizing home loans.

The Washington Post on Fannie/Freddie:

"By Zachary A. Goldfarb

Washington Post Staff Writer
Monday, December 22, 2008; D01

Policymakers are looking to revamp the nation's home loan system next year after the collapse of U.S. housing and mortgage markets spurred the current economic crisis.

Under one possible approach, Fannie Mae and Freddie Mac, the federally run companies that control half of the nation's $11 trillion mortgage market, would disappear, leaving lending primarily to private banks( YES ). Taxpayers would no longer be on the line for subsidizing home loans( GOOD ). But analysts say it could become much harder to get a mortgage -- at least one with a relatively low interest rate and a 30-year term( AND ? ).

Under another approach, Fannie and Freddie would remain. They could continue as private companies, trying to strike the difficult balance between the demands of profit-seeking shareholders and those of policy-oriented lawmakers. They could also be turned into government agencies. In either of these cases, taxpayers would remain potentially exposed to trillions of dollars in losses( PLEASE NO ).

The debate comes after the nation endured a bruising effort to promote homeownership in the past decade. Fannie and Freddie provided hundreds of billions of dollars in loans to people with blemished credit records or other financial limitations, which led to huge losses and the government seizing the firms in September as the financial crisis escalated. The government agreed to cover as much as $200 billion in losses( TOO MUCH ).

Now policymakers are looking at ways to prevent a relapse while maintaining Fannie and Freddie's charge of supplying consistent funding for mortgages. Fannie, Freddie and government agencies are funding nearly all of the nation's home loans; private lenders have all but disappeared( CROWDING OUT ).

"If we want to divorce the federal government from the risks of the housing system, you would privatize it," said Howard Glaser, a housing consultant who has worked for Fannie and Freddie. "The cost of that is you never know if you'll have mortgage finance available. Case in point: today( NOT SURE OF THAT )."

Fannie and Freddie were chartered by Congress 40 years ago as private companies with a government mandate to buy mortgages from lenders, package them, guarantee them against default and sell them to investors around the world. As a result, borrowers in big cities or small towns could go to big banks or small thrifts and get a 30-year, fixed-rate loan at an affordable rate.

But risks always loomed. Investors assumed that the government backed Fannie and Freddie, even if they did not have such support officially( IMPLICIT GUARANTEE PROVED CORRECT ). As a result, the companies could borrow cheaply and grow big -- with as much outstanding debt as the U.S. government. But the housing crisis crippled the companies, prompting the Bush administration to take them over out of concern they'd severely damage the world financial system.

Some longtime supporters of Fannie and Freddie say they must change, but still see a need for the government to play a role. "The Fannie and Freddie model has to be approached and the private-public entanglement, I think, will be undone," Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said in a recent interview. Frank said the reform of Fannie and Freddie is likely to include "some subsidy( THIS IS BETTER ) for enhanced affordability and increasing the flow of mortgages."

But there is little agreement about precisely how to restructure them. While Frank no longer thinks the hybrid model( THANKFULLY ) is viable, another influential lawmaker does. "The hybrid is the best( FOOLISH. ZERO LEARNING CURVE )," said Sen. Charles E. Schumer (D-N.Y.), who leads the Joint Economic Committee. "The hybrid nature should remain."

President-elect Barack Obama has said little on the topic. Obama's chief economic adviser, former Treasury secretary Lawrence Summers, has long been a critic of the risks posed by Fannie and Freddie. In a Washington Post opinion piece this past summer, Summers wrote that the government should use Fannie and Freddie to support the housing market during the crisis and that the government should then "divide their functions into government and private components, the latter of which would be sold off in multiple pieces( NO HYBRID HE SAID )."

One model gaining attention among some top policymakers would incorporate public and private elements, dividing Fannie and Freddie into separate components. One part of Fannie and Freddie's business involves buying mortgage bonds and other assets, holding them in a portfolio and trading them -- much like any other investment fund. This component would be privatized, with no government backing( FINE ).

A much bigger part involves the guarantee business, where Fannie and Freddie pool mortgages and guarantee timely payment of principal and interest. This area would receive explicit government backing( IF SO, IT SHOULD BE EXPLICIT ), possibly from the Treasury if it agrees to insure mortgages( CDSs ) in exchange for a fee.

Other options under discussion include turning the companies into public utilities, which would keep them highly regulated( THEY WOULD HAVE TO BE ), or cooperatives of large banks or of the Federal Home Loans Banks( FINE, IF PRIVATE ).

Some advocates of reducing or eliminating the government's role in the mortgage market argue that policymakers have erred in providing so much support to keeping mortgage rates low over the years -- not just through Fannie and Freddie but with tax breaks and accounting rules that made it easier for banks to own mortgage securities. Low interest rates, they argue, have artificially inflated housing prices and led too many people to buy homes with loans they cannot afford( I DON'T LIKE THE SUBSIDIES, BUT INDIVIDUAL HUMAN ACTIONS ARE RESPONSIBLE FOR BAD LOANS ).

"The problem with subsidizing mortgages is you're subsidizing people getting into debt. You're putting people into houses with no equity( THIS YOU SHOULDN'T DO )," said Arnold Kling, a former economist at both the Federal Reserve and Freddie Mac. "The goal should be getting people to own homes on a sound basis( TRUE )."

Kling would prefer that the government subsidize a down payment on a home, either through a tax-free savings account or another mechanism( I AGREE ).

Lawrence White, a professor of economics at New York University, argues that all the measures focused on the mortgage market have diverted capital from other important parts of the economy( TO SOME EXTENT THAT IS TRUE, BUT THAT'S UP TO INDIVIDUALS ).

"We invest more in residential structures and related things and less in factories and less in human capital," he said. "There are trade-offs. Investors have their choice between investing in a General Motors bond and a mortgage bond( TRUE )."

There are a number of risks associated with the private model. Anthony Sanders, a professor of finance at Arizona State University, argues that there's no guarantee that the private markets would do an adequate job of keeping the system functioning well. "Let's be honest: The commercial banks did not do a very good job since 2003" when they rushed into subprime loans, he said( BUT THEY ASSUMED IMPLICIT GOVERNMENT GUARANTEES ).

But Sanders also rejects the idea that Fannie and Freddie should be turned into a government agency, like the Federal Housing Administration. "If we load everything on the books of the federal government and there's no incentive to perform," he said, "we will see a lack of monitoring, we'll see underperformance( OK )."

In the past, the companies' powerful corps of lobbyists( YES ) could counter efforts to change the way they do business. Their lobbying activities stopped when the government took them over in September. Still, the companies themselves may weigh in.

Top executives at Fannie Mae and Freddie Mac have been assigned to study what the companies and mortgage market would look like if Fannie and Freddie were not what they are today, but they won't be making recommendations.

"I don't have a fixed view on this right now," said Fannie Mae chief executive Herbert M. Allison Jr., whom the government selected to lead the company. "I believe that the approach should be less about Fannie and Freddie and more about how to best meet the needs of the American public and promote responsible homeownership ( GOOD IDEA )."

Staff writer Lori Montgomery contributed to this report."

This report surprised me, given the supposed centrality of the Mayer/Hubbard plan in recent discussions, which would seem to necessitate a government role in the program.

"With prices plummeting, foreclosures soaring and the mortgage market in disarray, the country should rethink a federal housing policy that has failed

Two interesting posts about government intervention in the Housing Market, which is an issue we might want to consider given that the government is currently considering a massive intervention. It would seem prudent to have some goals or principles available with which to assess these various plans for dealing with housing crisis.

First, Dean Baker in the Guardian:

"The Bush administration is packing its bags and heading out the door. As they leave, we should insist they take the garbage with them. Among the items in the garbage pile should be the "ownership society".

With the collapse of the housing bubble throwing the economy into the worst recession in 70 years and the stock market deflating to levels not seen for more than a decade, the ownership society's proponents have not been anxious to talk about this concept lately. However, that shouldn't stop the rest of us from bringing up the topic.

Just to be clear on definitions, what distinguished the proponents of the ownership society from other people is that they argued for ownership as an end in itself. In the case of social security, the ownership crew wanted workers to take the risk of market fluctuations and bad investment choices, rather than having the guaranteed retired income provided by social security.

Their argument implied that these risks were ends in themselves. The returns from individual accounts could easily be beaten by the collective investment of social security money, which would lead to lower administrative costs than individual accounts. Incidentally, the higher administrative costs associated with individual accounts would mean higher income to the financial industry."

I think that there is still an argument for owning a home as opposed to renting, even, or especially for, people with less money. Namely, their money is being spent on an asset which they can sell at some point in the future, not going to a landlord. So, ownership, as opposed to renting, is a better investment, and an end in itself.

"When it came to housing, the ownership crew wanted everyone to be a homeowner. It is easy to show that in normal times it will not make sense for many people to own. There are large transaction costs associated with buying and selling. (Incidentally, these transaction costs are income for the financial industry.)

Typically, the round-trip cost of buying and selling a home, which includes realtor fees, points on mortgages, the cost of appraisals, title checks and other items, will be close to 10% of the sale price.

This is a substantial addition to housing costs for a family who will only be in a house for a short period of time. For a family buying a $300,000 house that incurs 10% round-trip transaction costs, the addition to their housing expenses will be $7,500 a year (more than $600 a month) if they live in this home for four years.

Tens of millions of families will live in their homes for less than four years. Changing employment and family situations or health factors often force people to move. For younger, less stable families, homeownership is likely to be a bad financial bet."

Yes, but that's a different point. Obviously, at least to me, the buyer needs to be able to afford the house. That doesn't mean that owning a house isn't an end in itself and a better investment than lending.

By the way, it's fine to point out that there are vested interests lobbying for any policy, but, remember, there are generally two sides to that lobbying. One can imagine Landlords lobbying against ownership by producing frightening scenarios against owning a home, trying to frighten away even qualified buyers. I don't know that such lobbying exists, but, in and of itself, lobbying or vested interests don't disqualify a policy. It's a version of Poisoning The Well, quite frankly.

"Of course that's the case in normal times. Encouraging people to buy homes as the bubble was pushing house prices to ever more unsustainable levels in the years 2003-2007 was the height of foolishness. This social engineering by the ownership society crew helped to inflate the bubble to ever more dangerous levels. The new homebuyers in these years, at least in the bubble markets, saw any wealth they had managed to acquire destroyed in the collapse."

Here we disagree as well. While government incentives can influence behavior, they cannot mechanically cause people to ignore sensible investment practices and procedures, or commit fraud, say. I can agree that these incentives helped justify some of the impetus for people buying houses, but not for the practices by individual human beings that caused this bubble.

"While we should not expect any mea culpas from the ownership gang, we should demand an end to their influence on public policy. In the case of retirement policy, the focus must be on providing mechanisms through which people can put aside money for a secure retirement. We don't have time for those who want to give people ownership at the cost of a secure retirement.

In the case of housing policy, the goal must be to give people good secure housing options. In some cases, this will mean homeownership. However, for many families, at certain points in their life, renting will be the better option."

I want to to stick to housing. Frankly, the only reason that I can see for Baker bringing up Social Security is to Poison The Well again, in the sense that he feels people's views on Social Security will positively effect his argument about housing. The two issues are not identical.

However, what he says about owning a house or renting is, again, obviously true. For some people, renting is the better option.

"A serious housing policy must ensure that good rental options exist. It should also seek to provide renters with some of the housing security that homeowners now enjoy. For example, restrictions on the grounds for which tenants can be thrown out of their homes (which exist in many cities) would provide renters with much greater security."

No sooner does he criticize housing policies, then he advances policies for renting. Surely we've learned to be dubious about government's good intentions as compared to its actual effects. Wasn't that the point?

"The disaster hitting the economy and the country's homeowners should force the Obama administration to rethink national housing policy. If progressives had been responsible for promulgating the same sort of disaster as the ownership society crew, they would not be allowed near the halls of power for the next half-century.

We don't have to banish the ownership crew, just their ideology. We need a serious discussion on housing policy that focuses on the goals that we want to achieve. We can't afford have the luxury of a housing policy that is driven by an ideology of homeownership."

It's a good idea to critique and justify all government intervention in the housing market, but it still seems to me to better, on the whole, to own a house rather than rent, if you can afford to do so.

Now Edward L. Glaeser and Joseph Gyourko on Economix:

"America shouldn’t waste the current housing crisis. With prices plummeting, foreclosures soaring and the mortgage market in disarray, the country should rethink a federal housing policy that has failed."

That's a very good idea. I don't like the use of the word "waste", which seems to be straining to find a benefit to the crisis. On the whole, I'd rather use less unnerving pedagogical tools.

"The policies that got us here, like Freddie Mac, Fannie Mae and the home mortgage interest deduction, put too much faith in subsidized borrowing.

Encouraging everyone to make highly leveraged bets on housing was patently a mistake. Housing policies of the past also erred by aiming at amorphous, often contradictory objectives, including higher homeownership rates, more affordable housing units and, most recently, higher prices. Those policies then mistakenly applied the same policy medicine to every housing market, whether housing was abundant and inexpensive or scarce and unaffordable. "

The incentives might have contributed to the problem, but they didn't cause the problem. An incentive is just that, a reason for doing something. There are always other possibilities and reasons to be considered in any action.

"The problems of old-style housing policy are well illustrated by the unwise proposal being considered to provide subsidized loans to home buyers at 4.5 percent interest. The historical, quite modest relationship between interest rates and housing prices suggests that this proposal will increase housing prices by at most 5 percent. A 5 percent price rise will do little to stem foreclosures in markets where prices have already fallen by 30 percent."

Here I agree, and said that we should let housing prices fall another 5 %, which would be a better deal for the buyers if rates remained roughly where they are now.

"Subsidized lending looks cheap, but isn’t.

When the government lends, taxpayers end up paying for the defaults that follow. Those people who claim that the plan will be cost-free seem to forget that this spurious argument was made to justify Freddie Mac’s and Fannie Mae’s credit guarantees. The policy will also encourage more overbuilding in Las Vegas and more over-borrowing in Detroit, neither of which is a good policy objective. "

Subsidies are not cost free. Although, one can imagine the government running a mortgage business that makes money. Here's where the contradiction comes in, because, in order for it to do so in the taxpayer's best interests, the terms would have to be very stringent, and wouldn't be possible for borrowers on the margin. If you decide to loan to more risky borrowers, then you have to state up front that possible losses are acceptable and justifiable.

Subsidies can effect the market in which they are used, often with unanticipated results. They should be used carefully.

"In our new book, “Rethinking Federal Housing Policy,” published by the American Enterprise Institute (and available for free download here), we argue that federal housing policy should ensure that our poorest citizens are able to live in decent housing ( I AGREE ), and should address the high housing costs facing many middle-income Americans ( DON"T AGREE, BUT THIS COULD BE DUE TO A DISAGREEMENT ABOUT MIDDLE CLASS ).

These are two distinct problems that require two different solutions — neither of which involves subsidized lending."

"The first problem, the shortage of housing for the poor, is best solved by providing more housing vouchers, not expensive tax programs aimed at stimulating construction of affordable housing. Subsidizing developers to build new housing for the poor makes no more sense that paying auto companies to provide a special line of poor people’s cars. Our current system, where the poor generally buy used cars, is a much more efficient way of providing cheap transportation. Section 8 vouchers can enable the disadvantaged to live in existing homes, which is much cheaper than new building.

The Low Income Housing Tax Credit, the primary tool for subsidizing housing supply, makes the mistake of trying to apply the same rules everywhere. It subsidizes new housing in Manhattan, which needs more building, and in Buffalo and Houston, which already have plenty of cheap homes. A better approach would be to scrap the tax credit and make Section 8 vouchers more available and portable across cities."

That's fine, but a voucher is a subsidy, isn't it? It could effect prices. Anyway, yes, I prefer a voucher.

"Section 8 vouchers aren’t going to do anything to ease the high housing costs facing middle-income Americans, though. That problem requires policies that reduce the barriers to building.

The current housing price slump shouldn’t disguise the fact that homes in San Francisco and New York remain extremely expensive by historical standards. Prices are far above construction costs because robust housing demand, fueled by rising economic productivity, has collided against barriers to supply, like minimum lot sizes and height limits.

Borrowing subsidies, including the home mortgage interest deduction, do little good when housing supply is constrained. In markets with limited supply, credit subsidies push up housing prices, and make housing less, not more, affordable.

Moreover, the benefits of the deduction go disproportionately to richer Americans who itemize on their tax returns and own bigger homes. Rather than a new round of credit subsidies, it makes more sense to gradually reduce the upper limit on the home mortgage interest deduction and shrink the public role in encouraging people to bet big on housing.

The only path towards widespread affordability is to build more, which requires reducing NIMBYist regulations. Localities tend to put their own interests ahead of the nation’s interest by restricting building in order to keep prices up and reduce congestion. The federal government should increase its efforts to counter this tendency. After all, stopping building in one area just leads to building and more congestion somewhere else. In other settings, when groups try to increase prices by restricting supply, the government sends in the antitrust police.

In the housing context, this means prodding restrictive, high-cost areas to permit more building. New York and greater San Francisco are the two most productive areas in the country, but people have increasingly moved to lower-wage Sun Belt cities because those areas have low housing prices created by unfettered supply.

It is bad economics to let local barriers drive people to less productive areas, and it is also bad environmentalism. The environmentalists who prevent building in temperate California are actually increasing carbon emissions, by driving people to build in the far more energy-intensive suburbs of Houston and Phoenix.

Expensive localities are never going to give up their growth controls on their own, but the stimulus package provides a natural tool for promoting affordability. If some aid to expensive states is made conditional on permitting more construction, then pricey places will face incentives to permit more units and promote affordability. Those incentives will encourage restrictive cities and towns to look beyond their borders, and to make America more affordable by permitting more construction in the high-price housing markets that are undersupplied and unaffordable even to the middle class."

Here I agree. If people really want housing prices to stay down, then they need to change the regulations on housing construction and use. It's a trade off, but it's the one sure way to lower housing costs.

In essence, I agree that we should reconsider our housing policy now. Baker makes a good point about the vacuousness or negative consequences of boldly declaring an "Ownership Society", not tied to sensible economic practices. But Glaeser and Gyourko have better ideas about how to deal with our housing policy.

"I could be wrong, but this strikes me as an attempt to simply unglue a market which has become utterly stuck."

Free Exchange yesterday posted about the attempts to drop the interest rate on mortgages and get home buying moving, thereby stabilizing the prices of houses:

"MANY commentators have attacked the Treasury plan to use Fannie Mae to help bring mortgage rates down on the grounds that reinflating the housing bubble is the last thing we ought to be doing. Serious analysis of the programme, like this, from Felix Salmon, has also proceeded on the basis that the goal of mortgage rate reductions is to help homeowners by stopping and reversing home price declines. I'm not sure this is the case."

I actually do believe that they're trying to stabilize housing prices.

"I could be wrong, but this strikes me as an attempt to simply unglue a market which has become utterly stuck. Fear of housing as a sector has (understandably) become quite common, and as a result, buyers have exited the market in droves. This has made housing markets very illiquid, which is problematic. A dearth of buyers makes it difficult for markets to clear. Prices may come down too far, too fast, and homeowners willing to accept something like a market price on their home may still be unable to sell. This illiquidity produces immobility, which has its own economic costs, as well as unnecessary defaults. Falling prices with lots of buyers is healthy, in other words, while falling prices with no buyers is not."

I do agree with this as well, but the question is how to best unglue the market. I've said that we should let home prices fall a bit more before doing anything, but I understand the economic and political concerns of why this is being done.

"So what to do? Well, nothing grabs a potential buyer's attention like an eye-popping interest rate (as we learned, to our great detriment, during the early part of the decade), and 4.5% is an eye-popping interest rate. And there is evidence that this just might work. Interest rates came down after the Federal Reserve announced a plan to purchase $600 billion in agency debt, leading to a 38% increase in last week's Mortgage Bankers Association index of applications for loans for purchase."

I do agree that this might work well. I certainly agree that it will help. I do not agree on a target rate, and I would let the Fannie/Freddie infusion be tried first.

"Under normal circumstances, there is no reason to subsidise homeownership or to work to excessively lower mortgage rates, but at the moment housing markets are simply broken. If this plan brings buyers back, it just might be worthwhile."

It might work, and I've made my case.

By the way, when he says: "Serious analysis of the programme" : Does he mean to demean average citizens such as myself trying to voice an opinion. Who is he talking about?

"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.

“Congress has allocated hundreds of billions of dollars to reset mortgages"

Floyd Norris considers the plight of a luxury home builder in the NY Times:

"Today, Toll reported its fourth-quarter revenues. They are down again, with cancellations ticking up. A bit belatedly, Mr. Toll realizes his fleeing customers were right: There really is an economic problem.

He has a solution:

“We urge Congress to stimulate demand by reducing mortgage rates and fees and by providing incentives such as a buyer tax credit for the purchase of all types of homes. We believe these initiatives would offer the greatest benefit for the taxpayer’s dollar.”

The way he sees it, stabilizing home prices is the only way to keep all the other efforts from failing.

“Congress has allocated hundreds of billions of dollars to reset mortgages, help people who are in foreclosure, and protect those who have been the victims of rapacious lending practices. We believe all of these goals are very worthy. However, we believe that, if home prices are not stabilized, these efforts will be for naught, more mortgages will go under, and the taxpayers’ money will have been wasted.”

Others might say that tax breaks and unreasonably low interest rates helped to get us into this mess. Making new buyers overpay runs the risk of a repeat of what happened after the Japanese bubble burst, when artificially high prices simply prolonged the pain."

Do I hear a second for a Nobel Prize in Economics for Mr. Toll?

"Mr. Toll was asked in the call if any members of Congress were on board to back his plea to subsidize home prices. He said there had been talks, but he had no endorsements.

As to why the government should be subsidizing home builders when there is an oversupply of houses, he said the country needed the construction jobs."

Here's my comment:

He has a solution:

“We urge Congress to stimulate demand by reducing mortgage rates and fees and by providing incentives such as a buyer tax credit for the purchase of all types of homes. We believe these initiatives would offer the greatest benefit for the taxpayer’s dollar.”

Technically, I believe that he’s asking the Congress to pay to lower and stabilize prices. The demand is there. They’re just asking for better terms for themselves. Lowering the price even more by themselves or easing terms should accomplish the same object. It’s called supply and demand. Oh, and let’s add Ricardian Equivalence just for fun. To the extent that the government chips in, it forces the private sector out. I knew I had a use for that concept.

— Don the libertarian Democrat