It’s Not A Housing Problem, It’s A Leverage Problem: Bring Back 20% Down Payments

In a Bloomberg interview, economist and former St. Louis Fed president William Poole says that the fundamental problem is not housing, but leverage, both for individual, highly-leveraged households who had too little equity in their homes, and for the highly-leveraged financial firms that purchased the highly-leveraged mortgage securities.

Poole says there’s too much debt, too much leverage, not enough equity in general, and suggests phasing out (or reducing by 50%) the tax deductibility of interest payments for corporations, which encourages excessive debt for tax reasons. You can read the interview here.

Arnold Kling at EconLog agrees with Poole, and suggests that “If we go back to 20% down payments, the market will be more stable. I’m sure that in a free market we would see 20% down payments. Barney Frank is the only person I can think of who still wants to lend with little or no money down. He’s welcome to do it, but I dare him to use his own money instead of ours.”

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