As the recession grinds into its third year, calls for the president and congress to “do something” about it.
But, is it the federal government’s job to stimulate our economy? And, does such market intervention actually improve the average citizen’s financial condition?
While opinions vary on the first question, economic data shows that the government’s recent efforts to revive the economy have failed miserably.
For example, despite enactment of the Troubled Asset Relief Program (TARP) and other federal efforts to reinvigorate the housing market, average home values have declined from 9.5% (in the northeast) to 3.9% (in the south) over the past year, while the foreclosure rate has increased by over 24% since 2008.
In fact, Neil Barofsky, Special Inspector General for TARP (which was originally passed to protect home values and preserve homeownership), recently indicated that the program had “little merit.”
In his March 30, 2011 New York Times article, Barofsky wrote that “Congress was told that TARP would be used to purchase up to $700 billion of mortgages, and … modify those mortgages to assist struggling homeowners. Almost immediately … TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation’s largest financial institutions.”
In other words, the billions allocated to help financially distressed taxpayers instead went to the entities that helped create the crisis in the first place.
Unfortunately, government intervention distorts market forces and hurts those it’s designed to help. Such legislation is always administered by incompetent bureaucrats who make decisions based on political rather than economic considerations.
Though initially painful, the best approach would have been to allow the housing market to crash. For, while homes would have been lost and the net worth of many families would have suffered, true market values would have been established. Business people, investors and individuals would then able to make the informed economic decisions necessary to revitalize the economy.
If you’re skeptical, consider the fact that the President now wants to eliminate the mortgage interest deduction. This incentive has made it economically feasible for people to buy instead of rent for generations.
Can you imagine the impact this political decision would have on the housing market?