THE BLOG
09/12/2011 04:10 pm ET Updated Nov 12, 2011

Housing Cures Must Not Be Worse Than the Disease

Typically, a bias toward action is desirable. This is especially true in crisis situations, such as our current economic predicament. However, on occasion, we encounter suggestions for action which are so misguided that they cry out for a declaration that 'nothing' would be preferable. This is the case with Peter Goodman's piece in this space entitled "Obama's Job Creation Failure: He Did Not Fix Housing".

While the premise that housing woes were instrumental in dragging down the economy makes sense, the suggestion for corrective action, largely by fiat, poses a serious threat not only to our economy, but also to our liberty. For example, Mr. Goodman postulates that, "The president can force mortgage companies to aggressively provide relief to homeowners who owe the bank more than their homes are worth, writing down principal balances."

Really? On what authority can the president interfere with private contracts? If he may do so, what prevents him or Congress from taking similar action with auto loans, credit card debt or anything else? While well intended, this suggestion is a prescription for dictatorship and would undermine credit granting, which would be antithetical to economic recovery. If lenders believe that their loan contracts can be unilaterally modified, why should they make loans in the first place? The last thing our economy needs right now is a contraction of credit.

Similarly, in the same paragraph, Mr. Goodman confidently states that the president can, "Direct the Treasury ... to begin wielding serious sanctions against major lenders whose strategic incompetence and opportunistic intransigence have prevented meaningful numbers of troubled mortgages from being modified..."

While often correct as to the characterization of lender behavior, this statement is inconsistent with the fact that there is simply nothing unlawful about strategic incompetence and opportunistic intransigence. As such, there is no basis for government action. Allowing government action simply because someone determines that private actors have behaved poorly is a prescription for disaster in a society founded on democratic principles. Even assuming such action were appropriate to rectify incompetence, who is to make the determination as to its existence and significance?

Stating that these things can be done without discussion with Republican Congressional leaders, "The president could do all of these things without having to negotiate with John Boehner, Eric Cantor, Mitch McConnell, or any of the other Republicans who are indeed doing their best to constrain effective policy in a cynical bet that a bad economy is a good electoral strategy for their party...." is another way of saying that there is reason to disregard our Constitutional structure of checks and balances.

Stating that these actions would put "tens of billions of dollars in the pockets of struggling people" may be true in the short run, but the following comment that it would also "create greater certainty in the marketplace" is wrong insofar as it ignores the impact on lenders' future decisions.

While there is no question that we need better behavior and decision-making in the private sector, especially in the financial area in order to create and maintain economic growth, there is a reason why economists uniformly agree that allegiance to the rule of law is essential for developing economies. What Mr. Goodman advocates would abrogate the rule of law.

Perhaps a better alternative would be to advocate prospective changes in corporate law in order to create private incentives for better behavior. This author has advocated such changes in this space.

While I and many Americans share Mr. Goodman's disgust at the decision-making that caused the housing crisis, but we must be careful that our response not undermine our Constitutional framework. Mr. Goodman's concerns are legitimate, but there are better ways to address them. When times are difficult, we must pay the most attention to preservation of our cherished values and principles.