Housing finance reform: Should there be a government guarantee?

Omaha Homes For Sale/flickr

Row of Houses in Omaha, Nebraska on Jun. 25, 2010

Article Highlights

  • CBO estimated that if current policies are pursued the national #debt will rise from $14.3 trillion to $23 trillion by 2021

    Tweet This

  • Taxpayers will have to bear the burden of the subsidies that the gov't hands out through its support for housing finance

    Tweet This

  • The housing sector can run perfectly well without gov't backing

    Tweet This

Read the full text of this testimony as a PDF

This testimony is in three parts. First, I address a government guarantee for housing finance in the context of its adverse effects on the U.S. debt picture, on U.S. taxpayers, and on the overall health of the U.S. economy. In the second section, I address the arguments that are generally made in support of a government-backed system and show that they are without merit. In the third section, I briefly discuss how a fully private system for housing finance should be structured.

I. Problems Associated with a Government Guarantee of the Housing Finance Market

Effect on U.S. Debt

Although the government's overall debt position is not an issue that is usually part of the debate on housing finance policy, the fiscal position of the United States has deteriorated so seriously in recent years that the question whether to increase the national debt in order to support the U.S. housing market has now become highly germane.

The CBO recently estimated—even after the recent debt extension agreement—that if current policies are pursued the national debt will balloon from $14.3 trillion today to $23 trillion in 2021. Virtually all proposals for U.S. government assistance to the housing finance market assume that it will involve an explicit government guarantee, but even if this guarantee is only implicit—as it was with the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac—it will make no significant difference except in the budget numbers. As my AEI colleague Alex Pollock has pointed out, the off-budget debt of the various government agencies—primarily Fannie Mae and Freddie Mac—currently totals $7.5 trillion, but the bailout of Fannie and Freddie proved beyond question that this debt is every bit a part of the nation's debt as the securities are issued by the Treasury.

So, without any change in policies and without any further increase in the GSEs' debt, the national debt will reach $30 trillion in ten years. With this background, it is hard to believe that there is actually a viable campaign to have the government support the housing market once again. At a time when Congress is having great difficulty trying to reduce the debt by finding places where spending can be cut, it is astonishing that some in the private sector can appear before Congress to ask for yet more debt in support of the housing market, a sector of the economy that could function perfectly well without any government backing.

Accordingly, in considering whether the government should back housing finance, the first consideration this committee should have in mind is whether it would be good policy at this time to add to the U.S. government's financial obligations.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Peter J.
Wallison

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 27
    MON
  • 28
    TUE
  • 29
    WED
  • 30
    THU
  • 31
    FRI
Monday, October 27, 2014 | 10:00 a.m. – 11:30 a.m.
State income taxes and the Supreme Court: Maryland Comptroller v. Wynne

Please join AEI for a panel discussion exploring these and other questions about this crucial case.

Tuesday, October 28, 2014 | 9:30 a.m. – 12:15 p.m.
For richer, for poorer: How family structures economic success in America

Join Lerman, Wilcox, and a group of distinguished scholars and commentators for the release of Lerman and Wilcox’s report, which examines the relationships among and policy implications of marriage, family structure, and economic success in America.

Tuesday, October 28, 2014 | 5:30 p.m. – 7:00 p.m.
The 7 deadly virtues: 18 conservative writers on why the virtuous life is funny as hell

Please join AEI for a book forum moderated by Last and featuring five of these leading conservative voices. By the time the forum is over, attendees may be on their way to discovering an entirely different — and better — moral universe.

Thursday, October 30, 2014 | 2:00 p.m. – 3:00 p.m.
A nuclear deal with Iran? Weighing the possibilities

Join us, as experts discuss their predictions for whether the United States will strike a nuclear deal with Iran ahead of the November 24 deadline, and the repercussions of the possible outcomes.

Thursday, October 30, 2014 | 5:00 p.m. – 6:15 p.m.
The forgotten depression — 1921: The crash that cured itself

Please join Author James Grant and AEI senior economists for a discussion about Grant's book, "The Forgotten Depression: 1921: The Crash That Cured Itself" (Simon & Schuster, 2014).

No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.