Asking for a Housing Bailout

File under "strange bedfellows": over the weekend, both the Observer of London and Jim Cramer published desperate calls for the government to intervene to prop up the housing market.

The Observer's is the one with the weakest logic:

The financial system today has no spare capacity with which it can weather the storm. The banks raised money for their loans not by attracting savings, but by borrowing on international markets using mortgages as collateral. That trade was worth around £110bn in the year up to July 2007, when it abruptly stopped as the risks became obvious. But banks are still obliged, just as homeowners are, to repay their creditors.

Er, no. Mortgage-backed securities are backed by mortgages, not by banks. (The UK has very little in the way of covered bonds, which do have recourse to the bank.)

Meanwhile, Cramer's decided that Hank Paulson should essentially write a blank check to anybody with housing equity:

The only hope to break the chain of despair and turn around the endless declines in home values to the point where you SHOULD walk away from a home with a mortgage larger than the value of your house, is to stop this house-price depreciation...
Once mortgage paper packaged by the government enterprises is federal government paper, then ANYTHING can be worked out with the borrowers, and the borrowers represent the lions' share of the troubled homeowners in the country who have not already defaulted.
The government can cut the mortgage payments, and it can extend the terms, say to 45 years. It can take any hit to keep you in your home, and the paper is still insured.

Hey, I'd like to restructure my mortgage loan into a zero-coupon perpetual, do you think you could work that out for me, Mr Paulson? Thanks.

The fact is that the government has no business intervening in the housing market in the first place, unless it's subsidizing housing for low-income families. And it has even less business trying to keep house prices at ridiculously inflated levels at a time when the market finally is coming to its senses.

If Cramer wants the Treasury to embark upon a massive fiscal stimulus, I can think of a couple of hundred alternative ways of spending the money which would be far more effective than trying to prop up homeowners' equity. And the same is true in the UK. By all means, if the economy is spiralling into recession, go ahead and spend some money. But do it where it will have the greatest effect, not where it will simply perpetuate the very problem which caused the crisis in the first place.

(Thanks to Matt for pointing me to the Observer leader.)