by Doug Bandow
This article appeared in Forbes on December 28, 2009.
Cash for Clunkers (cars) is over. Cash for Clunkers (houses) continues. Legislators just extended the scandal-marred $8,000 home- buyer tax credit--which means another $11 billion will be wasted.
Ground zero of last year's financial crash was the politically driven collapse in the housing market. Six years ago, Rep. Barney Frank, now chairman of the House Financial Services Committee, declared: "I want to roll the dice a little bit more in this situation towards subsidized housing."
Uncle Sam rolled the dice a lot, and we all are paying the bill.
So far the home-buyer tax credit has cost $10 billion. As few as one-fifth of those taking the credit really were new buyers, which Steven Pearlstein of the Washington Post figured meant a $75,000 subsidy per new house sold. When Congress nevertheless renewed the credit, it also expanded the benefit to owners for up to five years, and raised income eligibility.
However, the credit is barely a rounding error compared with continuing losses by Fannie Mae ( FNM - news - people ) and Freddie Mac ( FRE - news - people ). These two "government-sponsored enterprises" (GSEs) promoted both subprime lending and mortgage securitization, which turned bad mortgages into bad securities.
Today Fannie and Freddie underwrite $5.4 trillion worth of private home mortgages. Yet Washington is keeping the GSEs busier than ever. In October, Secretary Timothy Geithner advocated "a one-year extension of the current loan limits" to help "support the continued availability of affordable mortgages for many working families and aiding the recovery in the housing markets." READ MORE @ CATO
This extended home buyer tax credit may help a lot of people but it doesn't guarantee a long-term positive effect for the economy. I see more of an impending crash after it expires.
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