Bursting Obama's Housing Bubble

Another utopian program fails.

The collapse of the Obama administration’s mortgage relief program comes at a time when establishment Democrats are refusing to acknowledge the failure of government to spur economic growth. What’s worse, the administration’s Keynesian acolytes are beginning to call for more new spending, even in light of the program’s collapse.

The mortgage program was initiated in February 2009, less than a month after Obama took office. It offered $75 billion to homeowners who saw their home values fall far short of the money they owed to banks for loans. Another $200 billion was guaranteed to corrupt government entities such as Freddie Mac and Fannie Mae, which fostered much of the housing and bank crises in the purported interest of social justice. These government institutions offered loans for little to no down payment with promises of continuing and unending equity. When the housing bubble burst, so did this promise to homeowners; they were forced into foreclosure or into the arms of a government bailout.

But for many, a bailout hasn’t come. It was reported this week that nearly half of those who were part of the mortgage program have been forced to drop out due to an inability to provide proper documentation, including proof of employment. Such documentation is lacking because many homeowners, thanks to 10-percent national unemployment, have no jobs. The program has continued to complicate a housing mess that has roots as far back as the Carter and Clinton administrations.

This news should alarm the administration and encourage it to take an immediate pro-growth stance toward the economy, but most indications are that it won’t. Some Democrat politicians are calling to make the Bush tax cuts permanent or to institute other pro-growth solutions, such as temporarily suspending payroll taxes. However, this sensible approach runs contrary to the background of administrations officials, who are short on real-world private sector experience, and long on the teachings of economists like Paul Krugman.

To understand the economic priorities of the administration is to understand Krugman. The mortgage program is rife with the tendencies of his type of economics. The New York Times columnist and Nobel prize-winning economist has led the call for more spending, and even a second stimulus, claiming the first one wasn’t effective enough – despite the failure of the initial program. He’s attacked more libertarian suggestions, such as Rep. Paul Ryan’s economic roadmap, with farcical claims of budgetary malfeasance and improper scoring.

Ryan has refuted all of these claims, but this surely won’t curtail Krugman’s weekly screeds in the New York Times, which are often low on facts and ideas, and replete with ad hominem. His approach to economics and opinion writing is best illustrated in his book “Conscience of a Liberal.”

Touting the “Great Compression,” Krugman’s book credits the tax and spend politics of FDR and later administrations for the great economic boom of the 1950s. He cites that the end of the boom coincided with the emergence of the conservative movement, but he uses few facts to bolster his arguments. Instead, Krugman uses racial demagoguery and class warfare rhetoric to make his points.

According to Krugman, the Great Compression was responsible for the destruction of the rich and the upper class, forcing them out of wealth and political power, while transferring both to the emerging middle class of the post-war years. This destruction of the rich was not a fluke, but a feature. Krugman’s tome incessantly cites this as economic gospel, and only reluctantly admits that the emerging American manufacturing sector after World War II and the demand for goods in war-torn countries in Europe and Asia, may have played a part in demand for blue-collar workers at home.

Krugman’s book makes no mention of economic life under FDR, which became progressively worse the longer he was president. His tax programs did nothing to bolster the economy, a situation that didn’t right itself until after World War II.

This economic dogma is inherent in much of the economic policy of the past year, such as the now failed stimulus and mortgage programs. Efforts are made to artificially increase demand, public-sector employment, and to recreate credit and housing bubbles instead of letting the market take its course and reset on its own. What this has resulted in is an ever-growing government and a shrinking private sector, as businesses stop investing and stop hiring under the threat of new fees and taxes. Without new businesses and employees to pay new taxes, the growing government runs up more debt on less incoming tax revenue, which worsens the economy. Things progressively degenerate, with sectors like the housing market never hitting bottom due to government interference.

This has to come as a shock to Krugman, who wrote “Conscience of a Liberal” in 2007, but updated it with a prologue in 2008 reflecting on the election of President Barack Obama. Citing this historic victory, Krugman said that American was in fact center-left, not center-right, and that Obama’s election would hail a “new New Deal,” including major health care reform along with a new Great Compression to further spur America into a new economic golden age.

A year later, the opposite happened. This would seem to be the inevitable result of a very profligate government, but this is lost on Obama. It’s also lost on Krugman, who readily admits in “Conscience of a Liberal” that a new Great Compression may not necessarily work.

“Now, maybe the dire predictions would come true if we tried to replicate the Great Compression today,” Krugman wrote. “But the fact is that none of the bad consequences one might have expected from a drastic equalization of incomes actually materialized after World War II.”

Those predictions were true prior to the post-war economic boom, and were only squelched with actual historic, core growth. They are also true today, and worth heeding, as Obama continues to ramp up spending in search of economic heaven.

B.J. Bethel is a journalist in the Midwest. He regularly writes about politics, film and sports