Paul Volcker, chairman of President Barack Obama’s Economic Recovery Advisory Board said during an interview with Bloomberg Television on Friday that the American housing market has to be “reconstructed.”
The former Federal Reserve chairman (1979-1987) complained about the decade-long interference of government in housing through the infamous Fannie Mae and Freddie Mac entities as well as the numerous incentives and controls aimed at boosting home ownership in America. The whole market, said Volcker, is “totally dependent, heavily dependent on government participation. It shouldn’t be that way. That’s going to have to be reconstructed.”
The situation deteriorated as a result of the recession. In the fourth quarters of last year, there were $390 billion in new mortgage originations, including home equity lines. Excluding the home equity lines, Fannie Mae, Freddie Mac, the Federal Housing Administration and the Veterans Administration stood behind up to 95 percent of those mortgages — an enormous increase in government or government-sponsored participation.
In total, Fannie Mae and Freddie Mac hold about $5.5 trillion in home mortgages which amounts to nearly half of all outstanding mortgage debt in the United States.
“Fannie Mae and Freddie Mac were not a good idea in the first place,” according to Volcker. “This hybrid public, private thing sooner or later was going to get you in trouble — and it sure got us in trouble big time.” Indeed, the fiasco caused the very recession that much of the developed world, the United States especially, struggles with up to this very day. “I hope we don’t go back to that model,” said Volcker, so he better do something about it. As one of the president’s top economic advisors, he should discourage attempts by Washington to greaten goverment’s interference in private sectors of the economy, including housing.