Over at the Corner, David Freddoso touts a series of tax subsidies the House GOP is proposing to encouraging further investing in the housing sector, including some substantial subsidies aimed explicitly at speculators. To which Jerry Taylor sensibly replies also on the Corner:

I know that there is plenty of political capital to be gained by providing handouts to middle-class homeowners and little political capital in removing the same. But a political party that ostensibly stands for free markets and limited government should not be in the business of underwriting or subsidizing private investments in anything unless we can find some plausible market failure in need of correction (and perhaps not even then).

Hence, the necessary question: Is there any market failure that would result in sub-optimal investment in private housing? Not that I am aware of.

I would, if anything, take this in the other direction. Preferential subsidies for investment in housing lead people to, on average, consume more housing and less stuff-that-isn’t-housing than they otherwise would. In other words, bigger houses instead of fancier clothes. This, in turn, has a substantial negative impact on the economy. Larger houses cost more to heat and cool, and larger houses lead to longer commutes. We shouldn’t stop people from buying big houses if that’s what they want to do, but it’s quite harmful to be specifically encouraging them to invest their resources in this way quite independently from the financial crisis. Reduce the tax-side subsidies to homeownership and we’d have somewhat faster economic growth, somewhat more public revenue, and a somewhat cleaner environment.

The initial wave of reactions to the Treasury/FDIC Public-Private Investment Plan was pretty hostile. This was followed by a more favorable response on Wall Street and a softening of outside analysts’ reactions on the grounds that (a) this seemed likely to make things better even if it’s imperfect, (b) it’s not really clear what viable alternatives exist. Now along comes to Martin Wolf to ruin the party and say this could make things worse after all:

I think of this as the “vulture fund relief scheme”. But will it work? That depends on what one means by “work”. This is not a true market mechanism, because the government is subsidising the risk-bearing. Prices may not prove low enough to entice buyers or high enough to satisfy sellers. Yet the scheme may improve the dire state of banks’ trading books. This cannot be a bad thing, can it? Well, yes, it can, if it gets in the way of more fundamental solutions, because almost nobody – certainly not the Treasury – thinks this scheme will end the chronic under-capitalisation of US finance. Indeed, it might make clearer how much further the assets held on longer-term banking books need to be written down.

Why might this scheme get in the way of the necessary recapitalisation? There are two reasons: first, Congress may decide this scheme makes recapitalisation less important; second and more important, this scheme is likely to make recapitalisation by government even more unpopular.

If this scheme works, a number of the fund managers are going to make vast returns. I fear this is going to convince ordinary Americans that their government is a racket run for the benefit of Wall Street. Now imagine what happens if, after “stress tests” of the country’s biggest banks are completed, the government concludes – surprise, surprise! – that it needs to provide more capital. How will it persuade Congress to pay up?

I . . . just don’t know. I think there’s a lot of genuine uncertainty about this stuff—what exactly will happen and how will the public react. The hopeful alternative is that the administration seems to be moving parallel to this with an effort to put a framework for nationalization in place such further recapitalization be necessary.

Gadi Baltiansky, a former Ehud Barak aide who’s now Director General of the Geneva Peace Initiative, says going into government was the right move for Labor because “With Kadima in the opposition, and Tzipi leading it, they would have had no real role to play and would have disappeared very quickly.” Still, for a supporter of this move he paints a pretty bleak picture, observing that “Bibi was desperate for a fig leaf for his government so that it would not be isolated in the world.” Baltiansky says it’s “important for [Netanyahu] to be perceived as being more open to the peace process, as being more reasonable than perhaps he is” and that’s the role Barak and Labor now get to play.

And then there’s this:

Pulse: Does Labor in the coalition help Bibi vis-à-vis the US?

Baltiansky: Not really because the inclusion of Barak and Labor in his government does not dramatically change the makeup of what is essentially an extreme right wing government. Lieberman still has to prove himself as the Foreign Minister and Barak as Defense Minister can’t change that. And Bibi, even with Labor alongside him, will still ultimately have to make bold decisions that are important to the US relationship, such as dealing with settlements, and other issues that will not be easy for him vis-a-vis his other coalition partners.

And this is from someone who thinks Barak made the right choice.

It’s worth underscoring how extreme this government is. Just a few years ago, everyone understood Ehud Olmert and Tzipi Livni and Ariel Sharon to be right-of-center politicians. Then the Likud Party to which they belonged split, with Bibi taking the right-right faction and Sharon taking the center-right faction. Now the further-right faction of Likud has formed a coalition with parties that are even more right-wing, plus Barak in a “fig leaf” role.