President Obama Still Likes Big Government: When it Helps the Banks

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Written by Dean Baker   
Tuesday, 16 August 2011 05:29

That's what the Washington Post told readers in a front page story. According to the Post, the Obama administration is leaning toward a system that would provide a direct subsidy to securitization by offering a government guarantee to mortgage backed securities.

It would be difficult to find an economic rationale for this policy other than subsidizing the financial industry. The government can and does directly subsidize the purchase of homes through the mortgage interest deduction. This can be made more generous and better targeted toward low and moderate income families by capping it and converting it into a tax credit (e.g. all homeowners can deduct 15 percent of the interest paid on mortgages of $300,000 or less from their taxes).

There is no obvious reason to have an additional subsidy through the system of mortgage finance. Analysis by Mark Zandi showed that the subsidy provided by a government guarantee would largely translate into higher home prices. This would leave monthly mortgage payments virtually unaffected. The diversion of capital from elsewhere in the economy would mean slower economic growth and would kill jobs for auto workers, steel workers and other workers in the manufacturing sector.

For these reasons, if President Obama was really against big government and job killing measures, he would oppose this new scheme to subsidize mortgage securitization. On the other hand, if the goal is to ensure high profits and big salaries for top executives in the financial sector, then a government subsidy for mortgage securitization is good policy.