The Never-ending Mortgage Crisis

John D. Geanokoplos and Susan P. Koniak write,

The plan announced by the White House will not stop foreclosures because it concentrates on reducing interest payments, not reducing principal for those who owe more than their homes are worth. The plan wastes taxpayer money and won't fix the problem.

I predict that in 2015 we will still be reading op-eds with suggested refinements to the housing bailout.  That is because the whole concept of bailing out mortgage borrowers is misguided.



The quickest and least expensive approach is to foreclose on delinquent borrowers.  Many of them are not even living in the homes that they bought, because they bought them for speculative purposes.  There are also some who are living in homes who are nonetheless speculators.  They bought houses that they could not possibly afford, hoping to stay in them by constantly refinancing, based on rising home prices.  

Those of us who did not take on too much mortgage debt are being told that it is in our interest to bail out our over-leveraged neighbors.  Really?  Which will do more to protect us in this crisis--donating money to troubled mortgage borrower or holding on to our life savings?

What I would most like to see is a housing market that reaches a natural balance of supply and demand.  Subsidized mortgage credit is the problem, not the solution. 

This episode reminds me of the regime of oil price controls in the 1970's.  Every few months, a new government scheme was put into effect.  The idea of letting oil markets determine the price of petroleum products was unthinkable, just as the idea of letting housing markets determine the price of houses is unthinkable today.  Finally, in 1981, President Reagan decided to stop the insanity and let the market determine oil prices.  My guess is that we will waste at least five years trying different forms of housing bailouts, just as we spent almost a decade in a futile effort to control oil prices.

Presented by

Arnold Kling

Arnold Kling earned his Ph.D in economics at MIT. He was an economist on the staff of the Federal Reserve Board. From 1986-1994 he worked at Freddie Mac. He started Homefair.com in 1994 and sold it in 1999. His fourth book, From Poverty to Prosperity, co-authored with Nick Schulz, is due out in April of 2009. He blogs regularly at Econlog.

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