Disappointing Democratic candidate Barack Obama earned the humiliation of his former special inspector general, who described Obama’s threat to make families follow his version of the American Dream as “scandalous”

Obama Hampers Incentive

Obama’s fellow Democrat, the former special inspector general of the troubled asset relief program (TARP) and NYU fellow said, “It’s just the latest in an unending series of Treasury capitulations to the banks.”

The remarks came days before a March 6 press conference, in which Americans were treated to more straw-man emotions in favor of taxpayer subsidies for many of the same banks that were bailed out in the first place when Obama told them:

No amount of money is going to be enough to make it right for a family who has had their piece of the American Dream wrongfully taken.

Announcing how taxpayers would subsidize his version of the dream, Obama said, “I’ll continue to do everything in my power,” to silence opposition when he promised the straw man’s family $1,000 a year to keep owning the house they live in through nearly $25 billion in taxpayer subsidies for his Home Affordable Modification Plan (HAMP).

What Obama didn’t say is that this is the same, disappointing HAMP from 2009, when he started his term in the wake of the housing crisis but made a health-spending plan his top priority. It’s also when he promised an 8% limit on unemployment due to the housing crisis that he gave a lower priority than government spending.

The big problem with HAMP is that it created a market incentive for banks to move houses through foreclosure. Now taxpayer subsidies to many of the same banks that got bailout money may change their incentive in time to save his reelection campaign.

But that won’t fix HAMP’s overall lack of incentive compatibility, a system in which each individual has a personal incentive to act in accordance with some overall interest.

International Comparison of Home Ownership Rates (%)

By saying home ownership is part of every American Dream and making taxpayers pay banks with incentive to support such a policy, Obama may be hurting the wider economy with factors related to the American economy becoming more like Spain, Portugal, or Italy and less like Denmark, Germany, or Switzerland, the latter keeping their AAA rating.

Housing economists from NYU explain:

Other developed countries have been able to sustain comparable or even higher rates of home ownership, without the elaborate subsidies and policy apparatus that has characterized U.S. housing policy and mortgage finance policy.

And that still doesn’t consider that the new economy also demands a supply of flexible workers, who don’t have an investment in the type of home ownership that Obama supports but that can lead a family into what economists define as the poverty trap.

Promote the general welfare through housing policy for 4% growth in the economy.

We have not yet begun to succeed — join me

References

Acharya, Viral V. Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance.  (Princeton: Princeton University Press, 2011).

Bannock, Graham, R. E. Baxter, Evan Davis, and Graham Bannock. Dictionary of Economics. The Economist Books.  (New York: John Wiley & Sons, 1998).

Engel, Kathleen C., and Patricia A. McCoy. The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps (New York: Oxford University Press, 2011).

Obama, Barack. “Press Conference by the President.” The White House (March 6, 2012).