Reflections on the Mortgage Bust and the Inevitable Political Reaction

By Alex J. Pollock
March 20, 2008
We enter 2008 amid the housing and mortgage bust which has, as night the day, followed the housing and mortgage bubble. The defl ation of this bubble, and the subsequent credit panic, was the biggest financial news of 2007, and as the deflation of the bubble continues into the new year, it is as much political as financial news. In every housing finance bust, there is an irresistible urge for politicians to “do something” —and they always do. In a financial panic, everybody wants to get a government guarantee, and in one form or another such guarantees are usually provided. Former House Banking Committee Chairman Jim Leach has said that, “The precept of doing nothing should be off the table.” The Secretary of the Treasury recently remarked, “Nothing is worse than doing nothing.” This is not true in economics, but it is absolutely true in politics....