The More Things Change, the More They Remain the Same

Fannie Mae and Freddie Mac, the two government-sponsored entities that were designed to promote home ownership, have been the biggest drain on the government's coffers by far in the TARP bailout. The government has poured $148 billion into them so far, on top of guaranteeing trillions of dollars of their debt.

These staggering losses are a manifestation of their seminal role in fueling the housing bubble and ensuing financial crisis. The government used them to subsidize housing, and in Democratic Congressman Barney Frank's words, he wanted to "roll the dice" with Fannie and Freddie to promote home ownership among low income people.

That "role of the dice" led to our catastrophic financial crisis.

So you might think, in a rational world where the Obama Administration claims it wants to prevent future financial crises, that the government would recognize that subsidizing the housing industry and mortgages should end, so bubbles are less likely to develop and so taxpayers are no longer on the hook for bad mortgage loans.

But the power to influence and control the housing industry, and to direct subsidies to favored constituents, is to tempting to the Obama crowd. Treasury Secretary Timothy Geithner has kicked off the administration's discussions of "housing reform" by saying that ther government should retain a role in the the mortgage finance business. Moreover, Geithner says one reason for this need for a government role is that 90% of new mortgage loans made over the past three years have had government support - suggesting that the private market can't provide sufficient mortgage lending.

What it really means is that it is hard for private mortgage lending to compete with government subsidized lending. Canada, which despite its left-oriented government policies has no equivalent to Fannie and Freddie, has no problem providing private mortgages with home ownership rates at or above those of the United States.

The government needs to end its myriad of subsidies for housing: it needs to wind down Fannie Mae and Freddie Mac and other government-sponsored mortgage supporters; it needs to repeal the Community Reinvestment Act which promotes non-economic lending; it needs to end the mortgage interest deduction to reduce the incentives to borrow; and it needs to end the favored tax treatment of capital gains on housing vs. other investments.