There are, to be sure, lots of villains to blame for America’s financial crisis: regulators, Wall Street executives, credit ratings agencies, Alan Greenspan.
But the one baddie Washington doesn’t want to touch is, well, Washington. Its crime: pushing federal policies that favored ever-increasing home ownership, particularly from the mid-1990s on, and thus helping spawn the housing bubble at the center of the devastating meltdown. (We’ll focus on its legacy of financial bailouts another time.)
The sheer scope of the bipartisan, federal pro-housing undertaking is mind-boggling.
As Jeffrey Miron, a Harvard University economist, noted in testimony this week to the House Financial Services Committee, a list of past and ongoing efforts would include the Federal Housing Administration, Federal Home Loan Banks, Fannie Mae, Freddie Mac, the Community Reinvestment Act, the deductibility of mortgage interest, the tax-favored treatment of capital gains on housing, the HOPE for Homeowners Act and the $8000 homebuyer tax credit.
Then, of course, there are the Federal Reserve’s efforts to bring down mortgage rates.
The federal tax subsidy alone amounts to some $200 billion a year, according to the Tax Policy Center. Put it all together and it’s clear that Uncle Sam created immense incentives for home ownership, from which Wall Street eventually found a way to coin huge profits.
Well, at least for a while. Even former Federal Reserve chairman Paul Volcker conceded this week to the same committee that government housing efforts, in the form of Fannie and Freddie, were a “factor” in the crisis.
But while Washington is creating financial regulations and regulators, going after banker pay and questioning the role of the ratings firms, it seems intent on leaving its pro-housing policy bias intact.
That may be necessary for a while, until the housing market finds it legs. But then it’s time for Uncle Sam to gradually get out of the housing business. Breaking up and privatizing Fannie and Freddie would be a good start to an exit strategy, as would phasing out the mortgage interest deduction.
The risk of maintaining the status quo isn’t so much that we’ll have another housing bubble. Rather, it is the continuing opportunity cost of devoting so much precious capital toward housing.
Finding a better use for $200 billion a year in a country with a crumbling infrastructure, a yawning budget deficit and an uncompetitive tax system shouldn’t be hard.