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A Sensible Proposal

This idea comes from John Allison's letter to congress. Allison is the CEO of regional bank BB&T, and he has several simple and brilliant ideas on this financial mess. Here are the two that should be the core of a rewritten bailout.

5. A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed "rescue" plan.

6. This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.

How It Should Work

The government should offer a one-year income tax deduction for the entire cost of a purchased home. (I.e., If you make $100K this year and pay $100K for a home, you have zero taxable income.) Both buyers and sellers would get motivated and the real estate market would come roaring back. All sorts of illiquid mortgage assets would become easy to value again. You could cap the deduction at $100K or $200K (or Obama's "$250K rich line") to limit abuses by rich folks.

How Much Would It Cost?

Total income tax receipts for the year are about $1 trillion, so there's really no way this scheme could cost more than sinking $700b into bad mortgage debt. The difference is that consumers are buying a real house, and they would actually know how much they should pay for it. Unlike the Treasury who has no idea how to value a delinquent loan that a bank is trying to schlep off.

Making it a one-time tax break would ensure that buyers get off their butts and move quickly. It would also ensure that the market doesn't get too overheated, and it would bring government tax revenues back to normal in a year.

Conservatives will love it because it is a tax break, and little government oversight is needed. Liberals will love it because it is a massive housing subsidy for the middle class. Main Street will love it because the real estate freeze-up is visible and tangible.

Fannie and Freddie's paper assets would quickly recover in value, and they will be saved.

Congress will have bought some time to regulate (or make illegal) some of the credit derivatives that have turned out to be so evil, and the markets will have time to unwind them in an orderly way.

The world economy might survive as a result.

Am I missing something?

What Have We Learned?

The credit crisis is teaching us that the whole idea of mortgage subsidies is flawed. Imagine a government subsidy on auto loans, credit cards, or payday loans - madness. The only reason mortgage loans feel different is that we confuse the undesirable loan with the desirable subsidy on home ownership.

The reason a deduction on the whole cost of a home moves in the right direction is that it is a direct subsidy in support of cash transactions for hard housing assets. This rewards real people who want to actually own real houses. It does not reward banks that want to saddle consumers with debt, and it does not reward hedge funds with a supply of credit swaps.

We need to rethink how housing in the U.S. should work. We shouldn't subsidize borrowing. We should do as the Australians do, and subsidize home ownership directly.

Posted by David at October 1, 2008 02:55 PM