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To boost the economy, burst the regulatory bubble

From housing to Wall Street, government prodding and over-regulation have caused more problems than they’ve solved.

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When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act last month, the rationale for yet another monolithic regulatory bill was that the economic and housing bubble crisis was caused by too little regulation.

In fact, the evidence is becoming increasingly clear that over-regulation and Washington interference were the major culprits.

All bubbles burst, so the key question is not “Why did housing collapse beginning in 2007?”, but “Why did the bubble appear in the first place?”

The answer has many facets, but a common element is government support for home ownership.

History of interference

As far back as 1913, Uncle Sam carved out a tax deduction for interest that has since become the politically sacrosanct but economically unsound tax break for home loans. Essentially, this is welfare for the wealthy, since it primarily benefits rich homeowners. Even worse, a comparison with other countries that don’t provide such a deduction shows that this tax break doesn’t necessarily help home ownership.

Government increased its role in housing during the Great Depression with the creation of Fannie Mae, which was designed to create a liquid secondary mortgage market, thus freeing lenders to make more loans. Washington expanded this effort in the 1970s by creating Freddie Mac.

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