What Did And Didn’t Go Wrong With Housing Policy

Zachary Goldfarb’s article on the failures of Obama administration housing policy is extremely informative and I think does an excellent job of capturing some of the real world friction that exist in the policymaking process. Real gaps can exist between what people think they’re doing and what actually happens. Problems result. That said, I think Tim Geithner was completely right about this:

Generally, the Treasury secretary did not regard direct homeowner aid as the best use of taxpayer dollars. He favored expanding the economy by spending money on construction projects or programs to keep teachers and other workers employed, which would help the housing market. In meetings, Geithner would tell the president that if he suddenly had $100 billion more to spend, he would never advise spending it on housing.

I don’t think there’s ever been a particularly compelling reason to think that reducing mortgage debt is a dollar-for-dollar super effective way of stimulating the economy. High household debt burdens are a problem, but debt burden is a ratio between income and debt. If you can reduce the ratio by increasing incomes, that’s ideal. For example, if we appropriated funds to pay off unemployed 20-somethings’ college loans, they would then have more disposable income and there’d be some stimulative effect. But if we instead spent the money on employing the unemployed twentysomethings to do something, we’d get the same income effect but in addition, we’d have whatever output the 20-somethings are producing. That’s a much better use of money.

Now the plot changes when you consider the fact that Geithner didn’t actually win this argument. Once you create the $50+ billion HAMP pool instead of doing a public works project, you have to do something with that money. Whether or not setting tens of billions of dollars aside for that purpose was an optimal choice, once you’ve done it you have to make it work and so far they haven’t.