Heres a seldom-reported fact. Our recent housing bubble was caused by government. The intended consequence was to stimulate the economy. But below-market interest rates produced above-market real estate values.
Now the government seems determined to help us out of this crisis. Rep. Barney Frank, D-Mass., has proposed a bill that would fix the mortgage market with regulations. Hillary Clinton wants a 90-day moratorium on foreclosures and a five-year freeze on mortgage rates. Treasury Secretary Henry Paulson's more modest plan is to persuade lenders to forego any interest rate adjustments on subprime mortgages. But these are all just temporizing measures. If we want to keep mortgage holders in homes they cant afford, eventually a taxpayer bailout will be required.
The justification for the various subsidies and moratoriums is that they would prop up the housing market and prevent the economy from tumbling into a recession. Maybe they would. But these solutions actually perpetuate the conditions that caused the bubble and keep the market from making the necessary adjustments.
Beyond unintended consequences, there are issues of fundamental fairness. Why should homeowners who deferred other expenses and selected a house within their means subsidize those who did neither? Should people be entitled to relief if they have a subprime mortgage that they can afford? Should borrowers get help with a mortgage they received in the first place because they lied about their income?
All the cures are worse than the disease. Whether were forcing government or rich lenders or Wall Street to pay really doesn't matter much. The bailout schemes reinforce Americans belief that the consequences of risky behavior should be borne by government. Government should assure transparency, prevent fraud, honor contracts and butt out. For once, let the markets work.
Tom Patterson is chairman of the Goldwater Institute, a former state legislator and emergency room physician. A longer version of this article originally appeared in the East Valley Tribune.
East Valley Tribune: Governments help on housing will only hurt
Cato Institute: Dissecting the Bailout Plan
Heritage Foundation: The Subprime Mortgage Situation: Bailout Not the Right Solution