Treasury Secretary Geithner can’t envision the U.S. housing market without substantial government intervention, and he’s pushing to see that happen. While Geithner declined yesterday in his testimony to the House Financial Services Committee to say what his favorite option was, he did express his concern about the plan with the most limited government role:
Democrats and Republicans clashed over the workability of one long-term approach put out by Treasury, that would create a virtually privatized system in which the government’s role in the mortgage market would be significantly reduced. In this scenario, only the Federal Housing Administration would be allowed to guarantee a small group of mortgages for low- and moderate-income borrowers who meet creditworthiness criteria. Republicans leaned towards backing it while Democrats were opposed.
“With this plan, there would likely be no 30-year-fixed rate mortgage available to most Americans. What is your position on the 30-year fixed rate mortgage,” asked Rep. Maxine Waters (D., Calif.), expressing her concern about the option.
Geithner acknowledged that the 30-year-fixed rate mortgage would be more expensive and harder to get with this option than the other long-term options he put forward.
“The disadvantage of option one is you would leave the government with a more limited set of tools to protect economy in the face of the next recession, unless under option one you let FHA in crisis to dramatically expand its coverage,” Geithner said.
I am of course curious how soon Geithner expects the onset of that “next recession”, and if in fact he’s referring to the next leg down of the current one. According to Naked Capitalism, the fixes proposed by the Treasury are more about propping up housing prices to limit the impact of that recession than fixing the housing market:
A devastating little analysis by Dean Baker shows that even using Mark Zandi’s presumably pro-new-GSE assumptions, consumers would likely face higher all-in payments than they would under a purely private market system. So why prefer the other scheme? Because it is presumed to lead to higher housing prices, which happens also to be anti affordability. Yet most housing analysts argue that housing prices will eventually have to revert to long-standing relationships between incomes and rental prices. If the officialdom thinks it needs to attenuate the adjustment to buffer the impact to the economy, there are much simpler and cheaper ways to do it.
I loved the analogy and question posed by Naked Capitalism:
If the large segments of the sausage industry were found to be in the business of making poison sausages, this Administration’s response would be to have stress tests to show how much poison the sausages could contain without posing a public menace along with government-funded insurance in case anyone got really sick. So why aren’t we cleaning up the sausage factories instead?