Houses of pain: when did declining home prices become politically intolerable?

• Author: Cavanaugh, Tim

YOUR HOUSE isn't worth as much as you'd like it to be.

That's probably no surprise right now. Maybe it's unkind to rub it in. But a harsh appraisal has been one simple bit of reality to hold onto amid the frenzied, hysterical, high-pitched panic that seized leaders of government, business, and finance throughout 2008. In less than a year, vast swaths of American finance have been effectively nationalized, and the "Washington consensus" of more-or-less free market economics has come under the kinds of attacks not seen in a generation.

Why did this happen? Because your house was overvalued. It probably still is. But the watchmen of capitalism have chosen this time to act on a strange new form of economics. According to the new thinking, the value of an asset--even or especially an asset universally viewed as overpriced--must not be allowed to decline. This kind of economic intelligent design, endorsed by Republican and Democrat alike, even holds that a price decline cannot be a rational outcome in a competitive environment. Rather, it must be evidence of "market failure."

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Asking prices for homes since the June 2006 real estate peak have declined about 15 percent, according to the Office of Federal Housing Enterprise Oversight. Other indexes put the decline closer to 20 percent. The panic of the nation's elite, however, has been a gauche and amateurish 100 percent. At the beginning of 2008, the financial market was doing largely what it was supposed to do: reflecting changes in economic conditions, weeding out bad borrowers and lenders alike, rewarding the patient, punishing the rash, learning from error. But the cascading bailouts of investment banks, insurance companies, government-sponsored enterprises (GSEs), and commercial banks have replaced that relatively hands-free process with a new system in which decision making is centralized, reality is made to conform to political perception, irresponsible behavior is rewarded, and Washington technocrats decide who gets free money and how much houses should cost.

The federal economic seizure of 2008 is the most serious challenge to free enterprise since the Soviet era. It is far more grave than the Dow Jones Industrial Average's 40 percent decline from its October 2007 peak of 14,164 points, or the extinction of Wall Street's five largest investment banks. The bailout throws good money after bad in the credit markets, paves the way for every too-big-to-fail institution in the country to dump its bad luck and bad decisions on taxpayers, and turns "moral hazard" from an academic term into the prevailing economic paradigm. No surprise, then, that big-government liberals such as Slate Editor Jacob Weisberg are using the crisis to celebrate "the end of libertarianism."

It would be tempting to channel the Milton Friedman-bashing Canadian penseuse Naomi Klein and pretend the advent of Disaster Socialism was enacted according to some shadowy plan. But the evidence points to a simpler, and ultimately more troubling, theory. Lame duck Treasury Sec retary Henry M. Paulson, Federal Reserve Chairman Ben S. Bernanke, and President George W. Bush are not conspirators. They're just male hysterics. When put to the test, their support for free markets fell short.

'Don't Bail These People Out'

Their confidence in the American people fell even shorter. Along with a Democratic Congress and a hyperventilating press, Bush and his financial team didn't think Americans could stand to wait a few years before unloading that white elephant of a house. The idea that a nation formerly celebrated for its fortitude might be able to scrimp and save through an economic downturn (one that in most regions of Earth would look like a boom by comparison) was alien to them.

But in assuming that we were panicking, Bush's team appears to have been wrong: The 2008 economic interventions were in fact extraordinarily unpopular, foisted by politicians, business leaders, and the mainstream media onto a public that vociferously opposed them at every step. Mistaking the pressure of a national election and a historically unpopular presidency for a mandate, Paulson, Bernanke, Securities and Exchange Commission Chairman Christopher Cox, and others have begun a sweeping takeover of the private instruments of finance.

Major steps included the $400 billion Federal Housing Finance Regulatory Reform Act (passed by Congress and signed by President...