Paul Volcker, chairman of President Barack Obama’s Economic Recovery Advisory Board, argued in an interview with Bloomberg on Friday that the American housing market needs to be “reconstructed.”

The former Federal Reserve chairman (1979-87) complained about the decade-long interference of government in housing through Fannie Mae and Freddie Mac, as well as the numerous incentives and controls aimed at boosting home ownership in America.

The whole market, he said, is “totally dependent, heavily dependent on government participation. It shouldn’t be that way. That’s going to have to be reconstructed.”

Recession

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, or nearly half of all outstanding mortgage debt in the United States.

Hybrid

According to Volcker, “Fannie Mae and Freddie Mac were not a good idea in the first place.”

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 current recession.

“I hope we don’t go back to that model,” said Volcker.