Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy

Chapter 20. Misplaced Fault

	Ignorance more frequently begets confidence than does knowledge.
	--Charles Darwin

One of the oddest things to come out of the 2008 U.S. presidential campaign was a series of accusations seeking to throw off blame for the current economic crisis. It wasn't radical deregulation, the Federal Reserve, or so-called ninja loans that were at fault, politicos claimed. Instead, they shifted blame to decades-old government policy.

Some of the arguments had merit—at least as policy criticisms. However, none of them made the leap to correctly identifying the proximate causes of the present crisis. Here we'll look at the targets of five such arguments: the mortgage interest deduction, naked shorting, the Community Reinvestment Act (CRA), securitization, and last, Fannie Mae and Freddie Mac.

Mortgage Interest Deduction

The Sixteenth Amendment to the U.S. Constitution was made in 1913, effectively reinstating an overturned 1894 tax law and making income tax legal. Ever since, all forms of interest—including mortgage interest—have been deductible.

Indeed, the tax code provides a fairly generous benefit for being a mortgage-paying homeowner: The full interest deduction reduces your taxable income. Hence, if a renter and a homeowner are making similar monthly payments, the renter's after-tax costs are as much as 35 percent higher.^[192]

Several commentators have criticized this, and some, such as Harvard economics professor Edward L. Glaeser, claim it to be a major factor in ...