Tag: subprime mortgages

End, Don’t Cap, the Mortgage Interest Deduction

The housing market is soft, so this is the worst possible time to get rid of the mortgage interest deduction, right? Well, it’s not that simple.

1.) The deduction is not a subsidy to homeowners. It’s a subsidy to people who have mortgages, and then only if they itemize their taxes. Those claiming the standard deduction can’t take advantage. Paying cash for a home won’t qualify you for the deduction, either. Following a great recession fueled by would-be homeowners borrowing more than they could afford, it’s well past time for the feds to get out of the business of subsidizing home debt.

2.) Borrowing to own a home now costs homebuyers less in interest than it has historically, which means that the cash value of the mortgage interest deduction is lower than it will be under higher (future) interest rates. In other words, this particular tax-code goodie is at a historically low value to taxpayers, so why not get rid of it now?

Mitt Romney has nibbled around the edges of this idea. He would cap the mortgage interest deduction. In delivering a bit of a backhanded compliment, Yonah Freemark and Lawrence J. Vale write in the New York Times that “while Mr. Romney’s tax proposal overall may not be fair or sensible—or even mathematically logical—Democrats shouldn’t be so quick to attack any change to the mortgage interest deduction.”

Freemark and Vale would use the boost in federal revenue from ending the deduction to fund new housing programs. However, ending the mortgage interest deduction could also be used to lower overall tax rates. Mark Calabria and I chatted about the mortgage interest deduction this week for the Cato Daily Podcast.

What to Read on the Financial Crisis, Part II: Popular

Last week I offered my suggestion on the one book you should read, if you really want to understand the financial crisis. In this Part II, I offer a list of popular books, mostly written by journalists, along with very brief thoughts.  Part III, to come, will focus on more “scholarly” books.

As general rule, these popular books lack a theoretical framework of the crisis. They often have the feel of a “bad people did bad things” narrative. These are only books I’ve actually read (and remember), so its a selective list. Some are insider stories of only a single firm, and hence, somewhat limited in their usefulness. I will also give little evidence behind my judgments, so if you don’t value my opinion, stop reading now. 

1. All the Devils Are Here, by Bethany McLean and Joe Nocera. (2 stars) There’s only one reason to read this: it is the model of the establishment Left version of the crisis. This is the book that future Harvard professors will force their students to read to “understand” the evil Bush years. Otherwise, skip it. Wildly off both in terms of fact and interpretation.  Read any of their columns and you know what the book is like.

2. Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner. (4 stars) See Part I. Despite many flaws, probably the best of the “popular” books.

3. After the Fall, by Nicole Gelinas. (3 stars) I usually love Nicole’s stuff, and the story here on “too-big-to-fail’ is dead-on, but I think she’s off on Glass-Steagall and doesn’t make that case. Still, a relatively short and worthwhile read.

4. Fool’s Gold, by Gillan Tett. (4 stars) Exclusively about JP Morgan, but great background on credit default swaps. So despite its narrow focus on one firm, still a worthwhile read.

5. Chain of Blame, by Paul Muolo and Mathew Padilla. (3 stars) A narrow, but interesting, focus on subprime mortgage lending. Muolo is a long time reporter for National Mortgage News, so this has an almost insider’s feel of the mortgage industry, for that reason a worthwhile read.

6. Senseless Panic, by William Isacc. (4 stars) Author is the former FDIC Chair during the S&L crisis, and applies insights learned there to the current crisis. He misses a lot, but it’s breezy and short, and what is there is very worth reading. I wouldn’t put this at the top of your list, but if you’re going to read several, then add this one.

7. House of Cards, by William Cohen. (3 stars) Focused exclusively on Bear Stearns.  Again, a narrow focus, but generally fast moving and an interesting story line.

8. The Sellout, by Charles Gasparino. (4 stars) Despite a few minor factual errors, this was one of the better books.  He’s tough on Washington and Wall Street, and accurately so. 

9. A Colossal Failure of Common Sense, by Larry McDonald. (3 stars) Focused only on the failure of Lehman. Maybe too much useless personal detail, but otherwise an interesting story.

10. In Fed We Trust, by David Wessel. (3 stars).  Despite reading like a love letter to Bernanke, it is probably the best inside story of the Fed’s behavior during the crisis, which is also its weakness as the book offers little insight into happens outside the Fed.

Again, Part III will focus on more scholarly books, and in my opinion, generally more insightful reading.  That said, they don’t often make fun beach reading, which the above should be safe for.

Wednesday Links