The Government Shouldn't Guarantee Mortgages or Mortgage-Backed Securities

September 23, 2011

One of the arguments occasionally put forward by proponents of a government housing market guarantee is that the government will always come in and rescue the housing market, so we might as well start with a government guarantee and charge for it.  That way, it's argued, the taxpayers will at least be compensated for the costs of the inevitable government intervention, says Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute.

But the fact that the government rescued Bear Stearns, an investment bank, and AIG, an insurance holding company, and two automobile companies does not mean that it always will.

  • It is illogical to argue that government should now authorize a guarantee for the obligations of firms of this kind so that the taxpayers will be compensated for the losses they are going to incur in any event.
  • Nor does it make sense to assume that the government will always step in to rescue the housing market.

The notion that the government should insure mortgages or mortgage-backed securities because eventually it will do so anyway is deeply flawed.  

  • If that's the standard, the government should be guaranteeing the liabilities of auto companies and nonbank financial institutions like AIG.
  • Additionally, the circumstances under which the government might step in to rescue the housing finance system are not even clear; in fact, the only time the government has had to rescue that system was when the government had already been backing some of the participating institutions.
  • Finally, the whole idea rests on the assumption that the government will be adequately compensated for the risks it will be taking, and this -- given the history of government insurance programs -- is a fantasy.

Source: Peter J. Wallison, "A Guaranteed Disaster: Why the Government Shouldn't Guarantee Mortgages or Mortgage-Backed Securities," The American, September 20, 2011.

For text:

http://www.american.com/archive/2011/september/a-guaranteed-disaster

 

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