The Buzz

The Bias for Bailouts

The New York Times announced in its lead article on Monday that President Obama’s "cautious moves" to address the housing crisis proved inadequate, ensuring that the "painfully slow pace of growth" would be "the primary threat to Mr. Obama’s bid for a second term." The article, by Binyamin Appelbaum, suggests strongly that Obama should have embraced "unpopular proposals for a broad bailout of homeowners facing foreclosure." Instead, he opted for "a limited aid program."

This was an exhaustive piece of work, and it contained a substantial amount of information. But the analytical framework of the piece tended to skew it toward a particular point of view. The question that ribbons its way throughout the piece is whether Obama should have thrown more federal resources at the problem and fostered more federal control over the housing market—for example, by having the government take control of the market through the purchase of loans or by forcing mortgage companies to help borrowers.

Missing from the article was a nod to a contrary argument that merits attention in any post mortem on the housing meltdown. That is the view that the housing market hasn’t rebounded because it never was allowed to "clear," meaning real estate prices never reached bottom so consumers would know that an organic recovery could begin. And it didn’t clear because the market, and the broader economy, was propped up by government bailouts, stimulus packages and other financial props.

According to this view, it isn’t that the government didn’t bring to bear a big enough bailout; it is that it engaged in the bailout game at all. Those who press this argument often took to Japan’s "lost decade"—actually, nearly two decades—stemming from a similar bubble followed by similar props and bailouts.

The "market must clear" argument would seem to merit at least some recognition in an extensive article exploring why Obama’s policies failed to generate a robust rebound in housing. By casting the range of options as merely from Obama’s policies to much greater market-support programs, Appelbaum has constricted his analysis in ways that give it a political tilt.