I cannot decide whether the new housing aid bill is good or bad. Here is why.
Given the current situation and the number of foreclosures, the forced moves of households and forced sales of homes generate huge transaction costs. They stem from disrupted lives, moving costs, loss of equity, empty houses depreciating, etc. We all know how costly it is to change homes. Imagine do this on short notice and multiply this by a large number. And on the banks' side, their loss of capital (as homes lose value and debt goes bad) hinders them to give credits that could be productive for the economy. And banks have to devote resources to manage the foreclosures. The housing aid bill avoids many of these costs by keeping people in their homes.
However, bailing out homeowners and banks comes at a significant reputation cost for the government. As many have pointed out, this bill rewards the absence of personal responsibility. Those who were responsible will have to ultimately foot the bill. As in many other examples, if the government shows that it is tough in such situations and does not act as a lender of last resort, such situations would never happen. Well, they still may happen if there is limited liability (but less frequently), hence the need for some regulation. But essentially a tough government leads to self-restraint.
In other words, we have a situation that can be improved, but we also face a time consistency problem. The ideal would be that somehow the government would be able to state that it would be helping this time, but never again. This administration being at the end of its term may help, but presidential candidates have shown no sign of a commitment to toughness.