Congress Misdiagnoses Housing Sickness

Last week, Congress passed and the President signed a bill to deal with the so-called housing crisis. My wife and I--first-time homebuyers--are (hopefully) in the final stages of purchasing a foreclosed townhouse. One would think I'd be happy about the housing bill, since it contains a $7,500 first-time-homebuyers tax credit, and that incentive hasn't been capitalized into the value of homes yet. It has to be repaid over 15 years, so it works out to a 15-year 0% loan (actually negative when you factor in inflation). But I'm far from

Anyway, this bill is a disaster. Instead of fixing the problems that caused the housing bubble in the first place, Congress has made things worse. One policy change ends Freddie Mac and Fannie Mae's free riding on the American taxpayer; to continue their special line of credit with the U.S. Treasury, they now face greater regulation and scrutiny. Unfortunately, it would have been far better to remove their special preferences, shrink them down, and spin them off as fully privatized companies. Alas, such a remedy will have to wait. Incidentally, The Cato Institute has warned about this for years (just do a quick search on their website).

Yet even as these companies get bailed out at taxpayer expense, the legislation also taxes them to create an "Affordable Housing Trust Fund," which is essentially a slush fund for big-government special interests. It also provides funds to the states for buying, fixing, and reselling distressed properties. It's a band-aid solution to the symptoms of two major underlying problems: unfocused monetary policy and land use restrictions. Both are more than sufficient for their own post, so I'll abstain from carrying on now.

Congress should have eliminated special preferences for Freddie and Fannie, focused the Federal Reserve's mandate to only target inflation (and not concern itself with variations in employment or output), and ended transfers to the states to fund planning offices that usually do more harm than good.