Here is a letter I just sent to the Wall Street Journal:
To the Editor:
The subtitle of yesterday’s front page lead article, “In Reversal, Administration and Regulators Push to Make More Credit Available to Boost Housing Recovery,” raises the question of why the U.S. government should direct credit to housing at all. It points out one of many pockets of central economic planning in the US. Such planning is as harmful to us as it was to the Soviet Union.
No group of policy makers, whether GOSPLAN in the USSR or the Federal Housing Finance Agency in the US, can know how much lending should go to the housing sector.
That sort of determination should always be made by the decentralized market process, in which those who want to borrow to buy a house must compete for the scarce investment funds with those who want to buy a tractor, remodel a restaurant, build a new research center, or anything else.
Credit should be allocated to the various parts of our economy by market forces, not politicians and bureaucrats. There are two fundamental reasons why: The first is the knowledge problem of central economic planning: officials in Moscow or Washington cannot know the relative values of innumerable different investments, whether in houses or in any of the other things for which entrepreneurs and consumers might want to borrow. The second is the incentive problem of government action: Government officials have only weak incentives to act in the public interest but strong incentives to act according to political advantage.
The government should close Fannie Mae and Freddie Mac, give up housing policy altogether, and leave mortgage lending to the market process.
Department of Economics