Hank Paulson has decided that the answer to the crisis caused by the collapse of the housing bubble is to re-inflate the bubble.

Hank Paulson seems to have decided that the right response to a situation in which cheap credit pushed housing prices way too high compared to either rents or incomes, leading to over-investment in housing and then a fall in housing prices which then put lots of homeowners under water and threatened the solvency of the financial system is … wait for it … to offer cheap credit to keep housing prices way too high. Repeat after me: High housing prices are the enemy. High housing prices are the enemy. Housing prices must come down.

It’s the old principle of lowering the river rather than raising the bridge. Don’t try to re-inflate prices to justify the old mortgages; renegotiate the old mortgages to fit the new, lower prices.

I usually shy away from conspiracy theories, but just ask yourself: if Paulson were an al-Qaeda sleeper agent tasked with destroying the U.S. economy, is there anything, starting with letting Lehman go down, that he would have done differently?

Footnote Apparently the folks at Treasury are urging the real estate agents to lobby Congress for the plan. (And yes, it’s against the law to use Federal resources to orchestrate a lobbying campaign.)

Update Dean Baker points out that a temporary subsidy on mortgage interest rates will produce at best a temporary increase in prices, so the people who bought under such a plan would likely wind up under water when it came time to sell.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: