Yesterday the Freakonomics blog posted an interview with Raghuram Rajan, who pillories the federal government for a second-rate redistribution policy via extending (housing) credit, and Greenspan's Fed for remaining on the sidelines during the growth of the asset bubble.
I think Rajan could take his analysis about housing credit one step further, but it may not be a direction he'd want to take. During the 1990s, fiscal policy was relatively tight, resulting in monotonic reductions in deficits from 1992 and surpluses in 1998 through 2001. Politically, the balance of power produced PAYGO budget caps, welfare reform, and an environment where small, compartmentalized fiscal policies like the lifetime learning tax credit and other carve-outs were the only ones feasible. It seems to me that one could characterize Fannie and Freddie's expansion of credit to low-income home buyers as the same.
It would appear that some of these policies were more harmless than others. But stepping back, would it be right to blame this circuitous path to income redistribution, as called correctly by Rajan, on the overall program of fiscal austerity?