That's a valiant attempt to spin the mortgage meltdown to fit your ideology: It's all, somehow, the fault of the government.

Even your subject line is spun. The only government boon which could remotely be called a "subsidy" is the tax break on mortgage interest. But the IRS isn't involved in the present crisis. The implied guarantee of mortgage-backed securities might be considered a subsidy...for the lending industry, not the borrowers.

Somewhere recently, couldn't find the post right away, you said "The government's been in the mortgage business forever." Well, actually, the government got out of the mortgage business in 1968, when FNMA, founded 30 years earlier, was privatized to become Fannie Mae. What we got was the worst of all possible worlds: Instead of the direct accountability of a government agency we got arm's length overisight by politicians and political appointees, of an institution which retained a direct line to the Treasury. As the Wall Street Journal article to which you linked described it:

Because the politicians and financiers are part of the consensus that has long promoted the growth of Fannie and Freddie. Congress created the companies to spur home ownership and, in return, got an endless stream of campaign contributions and election support. Beltway elites like James Johnson and Jamie Gorelick made tens of millions working there. Wall Street marketed their MBSs to buyers around the world, pitching them as virtually as safe as Treasurys (due to the implicit taxpayer guarantee) but with a higher return. Everybody made a bundle.

(emphasis added)

Big Capital meets Big Government, and it was love at first sight. It was an equal partnership, and you can't spin it otherwise.

You go on to imply, without quite saying so, that it was government bureaucrats who issued all those dicey loans. Uh, no, as you know full well. It was Capitalists, in the purest sense of money-lenders, who did that. They created a stacked game, in which the dodge of mortgage-backed securities decoupled their actions from consequences, and in which the ultimate guarantee of a government bailout made them arrogant and cocky.

Mortgage-backed securities is a clever concept at many levels. It does admittedly create a powerful capital-creation mechanism, but it does so by coupling the mortgage market (once "safe as houses") to Wall Street, necessarily introducing a higher level of volatility and risk no matter how you try to patch it up with regulation and rules. It also injected a deadly speculation mentality into housing, which certainly made many homeowners wealthy on paper, and created fabulous wealth for lenders (the money you make on $500K @ 6% is exponentially more than $50K due to the miracle of compounded interest); but now that pyramid scheme is collapsing.

Notice the timing, by the way: FNMA is privatized in 1968, and by around 1970 people suddenly started viewing real estate as a speculatory cash cow. Real estate speculation was all anybody could talk about in those years.

Now that the pyramid scheme created by Big Capitalism is collapsing, you know that none of the plutocrats involved will suffer in the slightest, and we who are left holding the bag don't have any good options. Propping up the game means assuming unimaginable debt, letting the game meet its natural death will inflict serious hurt on everbody except the Capitalists who caused the problem. We'll no doubt go the bailout route as the lesser evil.

One reform I would love to see is to outlaw mortgage-backed securities. Fannie Mae can live long enough to administer the portfolio of MBSs it's stuck with--30 years--but should not issue any more of those toxic financial instruments. It should go into caretaker mode.

Returning the issuance of mortgages to real bankers will restore fiscal conservatism to mortgages. Bankers tend not to be impressed by promises of paper wealth through speculation, unlike the mortgage lenders who push their products on precisely those terms--"hey, don't worry you can't afford it now, think how rich you'll be when inflation doubles the (paper) value!".

I think that loan guarantees such as those issued by the FHA for first-time buyers, and the VA for vets, are less toxic than MBSs, and it probably is good public policy to continue them. The guarantee doesn't make those loans easier to get, it makes them harder because the agencies have an incentive to avoid default--it comes out of their pockets. (Which is the sort of accountability you have a right to expect with direct involvement of a government agency, in contrast to the Frankenstein's Monster of public-private "partnership" we get with Fannie/Freddie.)

'Course, you probably think that taking the leash off Big Capitalism completely is the answer. Yeah, and Big Capitalism thanks you from the bottom of its cramped little heart for being such a, what do you call it? "Useful" something?