Arnold Kling  

Mortgage Markets: The Public Option

What Do Conservatives Believe?... Spontaneous Order Denied...

The Washington Post reports,

Only one lender of consequence remains: the federal government...nearly 90 percent of all new home loans are funded or guaranteed by taxpayers...Government officials generally agree that it would be better for private lenders to resume their traditional role as major providers of finance for home loans. But policymakers now face some tough choices. They must decide how to reduce support for the mortgage market without letting it collapse.

If the government got out of the mortgage business, old-fashioned bank lending would revive. But the interest rates would be higher than the artificially low rates being offered by government agencies. The optimal time to scale back the public option and return to market forces is like the optimal time to quit smoking or go on a diet. That is, always soon but never right now.

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COMMENTS (2 to date)
Joe Cushing writes:

What if instead of quitting cold turkey, the gov. reduced the percentage of the loan that is guaranteed over time? Say 10% a year. In 10 years there would be no guarantee.

Boonton writes:

So I'm not sure I'm seeing how this squares with your 'great recalculation' concept. Supposedly all the chaos happened when people decided their 'future consumption' would take a dramatic shift from housing service (i.e. real estate) to venture capital (other future consumption goods).

But here you're telling us the gov't is supporting 90% of the mortgage market. If this is the case why the massive downturn? Wouldn't the 'great recalculation' be put on hold as the gov't props up the housing market and those whose jobs are directly and indirectly tied to it?

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