President-elect Obama has announced that Paul Volker will head a new Economic Recovery Advisory Board that will propose interventionist policies to bring about economic recovery from the recession.
At the same time, Obama announced that University of Chicago economist, Austan Goolsbee, wil head the staff of this new advisory board.
Goolsbee believes that incentives matter, and because of this he believes that goverment can, therefore, manipulate tax rates and market prices (through various fiscal and regulatory tools) to get people to act more along the lines the policy-makers would like.
One form of intervention that Goolsbee favored was extending mortgage loans to the the uncredit worthy. In a March 29, 2007 op-ed for “The New York Times,” he said that it was good that financial institutions were being prodded to lend money to those who would not meet normal standards for home loans.
Why? Because people should be evaluated on the basis of what their future income is likely to be in deciding whether or not they can offord to buy a house and meet the monthly payments, not their present income status.
Banks and other lending institutions were clearly misjudging who, therefore, was a “good risk” by only looking at someone’s ability to make a reasonable downpayment and meet those montly payments today.
Thus, Goolsbee was delighted that political and regulatory tools were being used to get those uncredit worthy into new homes. The private sector was not thinking far enough ahead, and that’s what the government needed to get them to do, Goolsbee said.
Well, we have now seen the future that Goolsbee was counting on, and it has turned out to be a disaster. Cheap, easy money policies supplied the Fed- created credit to feed the housing frenzy so many of those who Goolsbee want to get a house were able to become “home owners.”
So here we are. One of the economic “experts” who praised the misguided policies that generated the housing bubble now is to be a leading “player” is supposedly getting us out of the current economic crisis.
This another “footprint” telling us where Obama’s “journey of discovery” is likely to be taking us.