Mortgage Markets: The Public Option
By Arnold Kling
The Washington Post reports,
Only one lender of consequence remains: the federal government…nearly 90 percent of all new home loans are funded or guaranteed by taxpayers…Government officials generally agree that it would be better for private lenders to resume their traditional role as major providers of finance for home loans. But policymakers now face some tough choices. They must decide how to reduce support for the mortgage market without letting it collapse.
If the government got out of the mortgage business, old-fashioned bank lending would revive. But the interest rates would be higher than the artificially low rates being offered by government agencies. The optimal time to scale back the public option and return to market forces is like the optimal time to quit smoking or go on a diet. That is, always soon but never right now.