The Walking DebtDaniel Gross takes readers' questions about the mortgage crisis and the government's age-old weapons for fighting it.

(Continued from page 1)

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Harrisburg, Pa.: If we are going back to the New Deal, might it also be worth noting that if Americans are ready to sacrifice for war that we don't accept tax cuts during wartime?

Daniel Gross: Definitely a point worth noting.

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Capitol Hill: Would it be fair to say the housing-market collapse also serves as a sort of market correction? Ultimately as a result of this downturn, real-estate prices will drop, which needs to happen because home prices had been allowed to get too high, leading people to take out excessive mortgages for homes that they couldn't really afford.

Daniel Gross: There's no question that the collapse—which in most markets has been a relatively small decline—is functioning as a needed correction. Prices rose at an unsustainable pace for several years. The problem is that housing—unlike stocks, or other assets—is almost always bought with a huge amount of leverage (i.e. debt), which means that prices only have to fall a small amount in order for people's equity to get wiped out, with all the negative consequences that brings.

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Chicago: As your article points out, Fannie Mae was created in 1938 as a government agency. But in 1968, under LBJ, it split into two parts: Ginnie Mae, which remains a government agency, and Fannie Mae, which is a publicly-traded, shareholder-owned corporation. What would FDR think about the current structure of Fannie, under which taxpayers bear the risks, but private shareholders reap the profits?

Daniel Gross: There's no question that Fannie Mae evolved in a way that would have surprised FDR. His preference at the time was obviously for the government to handle this. And this situation in which profits go to shareholders while liabilities revert to the taxpayer probably wouldn't have pleased him.

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Boston: Do you see an expanded role for the FHLBanks going forward?

Daniel Gross: I think their role has been expanded a great deal already. Further expansion depends a great deal on how things pan out. Countrywide, as I noted in my article, accessed tens of billions of dollars of credit from FHLB. If Countrywide (or Bank of America, which is about to acquire Countrywide) doesn't make good on that debt, I think there will be widespread calls for FHLB to rein in its activities.

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Baltimore: It is my understanding of financial conservatism that the U.S. government is, per our Constitution, only charged with printing money, managing national defense by paying for and managing an army, etc., and the regulatory type functions provided by government that we are discussing here (the government backing bank loans, the government backing student loans, the government managing health insurance through Medicaid and retirement through SSA) are anti-free market and anti-Constitutional.

What would REALLY happen if the government discontinued "big government" as we know it ... ended transfer payments to individuals in the form of SSA payments, food stamp and other welfare payments, discontinued HUD and the Dept of Education (which was a goal of the Contract with America in the 1990s) as well as discontinued all of the regulation of markets which came out of the post Depression era?

Daniel Gross: What would really happen? In a word, chaos! The practices you describe may be anti-free market in some sense, but I don't see them as being unconstitutional.

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I don't have much to comment on with today's column...: but just wanted to say I enjoy your writing and always appreciate your ability to break down fairly complex financial issues so they can be understood easier.

Daniel Gross: thanks, mom!

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Daniel Gross: Thanks for all the questions!

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