Here we go again.
Wallison, American Enterprise Institute scholar and former White House counsel under President Ronald Reagan, points to an idea in the mix, one that is “as seductive as it is dangerous:” a private system but with an explicit government mechanism for future bailouts when they prove necessary.
“The rationale?” he writes. “If there’s a problem in housing finance, the government will inevitably step in as it did in 2008. So why not create a government insurance program now, compensating taxpayers for the burdens they will have to shoulder eventually anyway?”
This argument, he notes, has been advanced many times since Fannie Mae and Freddie Mac went under, most recently by the Bipartisan Policy Center, a Washington think tank. The plan, released to the public late last month, is already getting some favorable media attention, due to the fact it was written by two former Housing and Urban Development secretaries (Mel Martinez and Henry Cisneros) and two former senators (Democrat George Mitchell and Republican Kit Bond).
“A system for private housing finance with a government insurance backstop may sound reasonable, even sophisticated. But it is seriously flawed.”
First, he argues, such a system cannot logically be contained.
“There is nothing special about housing. Lest we forget, the government also stepped in to rescue the domestic automakers five years ago. Why not a backstop now for Detroit? At the end of this road is bailout nation: a government insurance backstop for every industry.”
Second, taxpayers never get compensated by establishing insurance funds.
“Congress, when it passed the Hurricane Sandy aid bill, bailed out the National Flood Insurance Program to the tune of $9.7 billion. That program had collected insurance over many years to protect against events like Hurricane Sandy—but it wasn’t enough.”