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Ways to Help

I think a headline about a new orientation toward “Helping Homeowners” may obscure more than it reveals. Look at what’s happening:

“The public policy case for reducing preventable foreclosures does not rely solely on the desire to help people who are in trouble,” Mr. Bernanke said. “More needs to be done.”

At the Treasury Department, meanwhile, top officials continued to work on a plan to bolster the housing market by subsidizing 30-year home mortgages with rates as low as 4.5 percent — a level that home buyers have not seen since the early 1960s.

Bernanke is correct. There is a strong policy argument for trying to get both recipients and lenders of bad loans to both take a haircut, and have people keep living in the homes they currently live in and keep making payments of some sort. The alternative will create vast tracts of vacant homes and drastically reduce the quality of life of everyone who doesn’t get foreclosed on. The logistics of working this out are tricky, but it’s a good idea. The basic foreclosure-and-auction mechanism has a lot of negative externalities when done on a mass scale.

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This thing about trying to bolster the housing market by subsidizing loans seems different. Are we hoping to reinflate the bubble? If credit for large purchases is going to be subsidized, wouldn’t it make more sense to subsidize credit for productive investment?