Why Ending the Mortgage Interest Deduction Would Save the Economy

"I disagree, when the government started subsidizing houses (both through the tax break and freddie and fanny)it caused the price of housing to rise. This created a false bubble where housing costs in some places twice as much as it should if the regular market forces were left alone."

No, if you look back at the depressions and panics of the 1800's, you'll see that they were often associated with real estate. And that was long before Freddie and Fanny. How many of those were really real estate bubbles that affected the economy vs how many was a economic downturn affecting the real estate market is anybody's guess. But I think for the most part, the real estate market responds to changes in the economy, and not vice versa.

Real estate can be subject to speculation just like tulips were. And clearly that has occurred in California and parts of Florida. When you have people buying houses just to flip them under the greater fool theory, that's clearly speculation. But that can happen whether you have an interest rate subsidy or not. A subsidy doesn't cause speculation. Speculations are caused by market psychology.

In most of the market, people don't demand more than the one house they intend to live in. The interest tax break may help them afford a nicer house, but I would submit most of the increase in price is because the houses are nicer not because a government subsidy is creating excess demand. The interest rate break makes the entry into home ownership more affordable, it shifts the substitution between rental and ownership towards ownership, and it may increase total demand a little, but it doesn't cause speculation.

"There is no way out of this mess that doesn’t include a lot of pain. "

I think there is.

Start with making energy, both electricity and fuel, as cheap as possible. Build nuclear plants, drill, remove taxes on energy. That'll boost productivity and reduce consumer's monthly expense, giving them more disposable income.
Close the border and start deporting illegals. Reducing the supply of labor which will reduce unemployment.
Some protective tariffs on electronics imports would cut the biggest dollar imports from China and rejuvenate some high-tech industries in the U.S., while also providing a temporary source of revenues to help bring down the deficit.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.