The Senate housing proposal includes $4B, several hundred million in tax breaks, and $6B for home builders. This seems wrong-headed to me. Home builders are not providing some public good with external costs that would cause them to be disproportionately targeted in a downturn. They came with their analysts and forecasters and investors and, after much planning, decided to build. They created so much of the excess supply that put pressure on this market and has led to such precipitous declines, particularly inthe south and midwest. They did it because they saw money; but with all of that intelligence, they must surely have also seen the risk. We can argue some other day about whether mom and pop should be expected to understand this, but one thing is clear -- the builders certainly did.
A cyclical economy - what other kind is there? - means that when the curve heads down, someone is left without a chair. Why should I buy developers a chair just so we can all keep playing?
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There are some who believe that this type of argument applies to pretty much everyone involved in the whole mortgage bubble burst fallout. I'm not in favor of very much government action or bailout.
Personally, I think that the most valuable solution to the problem of bad loans &c would be a simple rule:
"don't allow any bank to sell its loans to another institution for at least two years after the rate is scheduled to reset, or at least five years in the case of a fixed rate mortgage."
This would make sure that the originators are on the hook for keeping the brokers in line, and would incentivize them to make sure that people were getting appropriate loans.
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