TARP is Expanding; Housing Subsidies Too

Since the economy is beginning to recover, U.S. policy should be winding down TARP, right? And we should be ending mortgage subsidies to less credit-worthy borrowers, since that policy played a crucial role in causing the crisis in the first place, right? Well, guess again:

The Obama administration is close to rolling out two initiatives aimed at addressing lingering problems from the financial crisis: A long-delayed effort to cleanse financial firms of their toxic assets, and a $35 billion plan to prop up state programs that help lower-income borrowers get affordable mortgages.

This makes no sense.

The argument made last fall for having Treasury buy toxic assets from banks was that, if banks had been forced to sell then, they would have received "firesale" prices due to the crisis. This would allegedly have pushed more banks to fail, with negative repercussions for the credit system.

That argument is irrelevant now. Panic is over. If banks own assets that investors will buy only at heavily discounted prices, that is because these assets are not worth much. Let the banks take the losses; TARP purchases are just further bailout for the banks.

Propping up state "affordable" mortgage programs will help generate the next crisis by encouraging homeownership among people who cannot afford it. All affordable mortgage programs should be phased out, not expanded.