Financial Methadone?

Congress Tries To Help Housing Market
With (More) Tax Breaks, Subsidies

We've entered what George Carlin might call the "methadone phase" of the current housing/credit crisis.*

In this case, the "addict" is the U.S. housing market; the illicit drug is easy, cheap money (the best kind!); and the pushers are two so-called government-sponsored entities ("GSE's"), commonly known as Freddie Mac and Fannie Mae. Oh, yes, and the co-dependents: creditor nations such as China and Singapore, and flush OPEC members, that have willingly (so far) purchased the resulting debt.

Now that Uncle Sam has just explicitly guaranteed Fannie Mae and Freddie Mac's debts, their spendthrift ways -- if not the entities themselves -- are likely to come to an end. They'd better: with $5.2 trillion in guarantees and debt that the U.S. government is now responsible for, they pose a potentially mortal threat to U.S. solvency.

But everyone recognizes that going "cold turkey" would threaten an already fragile and, in many places, still-falling housing market.

What to do? Switch the housing market to temporary financial substitutes that stave off withdrawal, yet don't stoke the addiction. Voila! Financial methadone.

That's essentially what's in the new housing bill just passed by Congress and signed by the President. (At 700-plus pages, I doubt most members of Congress who voted for it really know what's inside, so I'm not going to presume to).

The legislation threatens to rein in Fannie Mae and Freddie Mac -- just not yet.

And it packs a whopper of a financial carrot for first-time buyers: essentially an interest-free $7,500 loan, that operates as a credit against one's federal taxes. Because it's "refundable," if you don't owe that much, the Government will send you a check for the difference.

In this case, the temporary aspect is the window of eligibilty: qualifying buyers must close on a home purchase between April 9, 2008, and June 30, 2009.

Will the "methadone strategy" work? Possibly. The housing market functions like an escalator, with first-time Buyers occupying the bottom rungs. Anything that strengthens their presence in the market makes the rest of the market healthier, too.

However, just as addicts must eventually wean themselves off methadone, eventually the housing market -- once healthy -- will likely have to give up its tax breaks and subsidies, too.

*My favorite George Carlin joke is about heroin addiction (actually, no laughing matter). Carlin recommends it, "because before you're addicted to heroin, you can have 10, 15 or even more worries; after you're addicted . . . you just have one."