In the May 27 Up & Down Wall Street column (“Bitcoin and Tech Stocks: A 21st Century Tulipmania?”), Randall W. Forsyth sharply criticized the mortgage-interest deduction, but passed over without comment the massive distortion caused by the government guarantee of Fannie Mae’s and Freddie Mac’s debt. He noted that “foreign investors bought $236 billion of U.S. agency securities” in the past year, mostly Fannie and Freddie securities, but didn’t mention the reason they’re willing to buy: The risk is all on the U.S. taxpayer.

The $236 billion is a 12-month flow, but the total stock of Fannie and Freddie obligations guaranteed by the government is $5 trillion. This guarantee is real and indubitable, although not formal. It artificially stimulates housing, induces higher leverage in the housing finance sector, and diverts resources to houses.

Both the mortgage-interest deduction and the guarantee of Fannie and Freddie get capitalized into house prices, pushing them higher and making them less affordable for the next generation, which is the opposite of their supposed purpose.

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