Put $35 Billion On That Horse With the Broken Leg


All and sundry report on a new Obama Administration proposal to provide $35 billion in emergency funds to state and local housing agencies in order to subsidize new mortgages. The money—$20 billion in purchases of bonds issued by state housing finance authorities (HFAs), and $15 billion in as-needed followup funding for the HFAs—is designed to get states back on track to subsizing more than 100,000 mortgages per year. Most HFAs have closed their doors to new borrowers since the credit unwind began.

Question for Keynesians: Why does government intervention in the market always have to be countercyclical in intent?

From a strictly political view, it makes sense to fight the tape anytime there's a downturn: The administration is under intense pressure to buoy real estate prices and demonstrate that efforts like the $75 billion Housing Affordable Modification Program are succeeding. Supporting real estate is a political winner because there is a vast lobby in favor of higher prices and a small, powerless lobby against. As Calculated Risk notes here, real estate prices, unlike unemployment, have performed more strongly than projected in the so-called Bank Stress Test, so there is some evidence for the hope that government efforts will prevent another steep decline in housing prices—though for reasons discussed here, these efforts are in fact very likely to fail.

But in terms of managing an economy, a strictly countercyclical policy is a boxer with only one arm. The government could, for example, engage in the pro-cyclical policy of providing compensation to lenders and/or borrowers who get the foreclosure process over with quickly. This would introduce a large stock of affordable housing into the market and help the people (lower and middle-income first-time buyers) whom this $35 billion is designed to help. And by encouraging the sale of a lower-priced home, rather than subsidizing the mortgage on a higher-priced home, it would help those folks without pressuring them to take on more debt. Again, it seems pro-cyclical intervention is more merciful than counter-cyclical.

All this assumes that government intervention in the economy is legitimate, so all libertarian caveats and to-be-sures apply. But as the underappreciated economist George Michael told us, if you're gonna do it, do it right-right. If you believe Keynesian policies make economic as well as political sense (and my understanding is that Keynesians do believe this), what's the justification for always attacking in the same direction?