At least this time Barack Obama actually had a plan.  Unlike the bait-and-switch moment from Tim Geithner on TARP II, Obama rolled out an actual plan to have the government force refinancing and lower payments for mortgage holders under water.  The markets reacted better than they did last week to Geithner’s epic fail, but that’s not saying much:

Wall Street extended its decline Wednesday after President Barack Obama released details of his $75 billion mortgage relief plan.

The plan is designed to help stabilize the housing market and reduce foreclosures. Sharp drops in housing prices and sales, coupled with rising foreclosures since the middle of 2007, have been a primary cause of the toughest recession in decades.

Mr. Obama’s announcement of the plan comes a day after he signed into law a $787 billion economic stimulus plan he hopes will help revive the economy.

In midmorning trading, the Dow Jones industrial average fell 25.40, or 0.34 percent, to 7,527.20.

Broader stock indicators also slid. The Standard & Poor’s 500 index fell 3.58, or 0.45 percent, to 785.59, and the Nasdaq composite index fell 4.80, or 0.33 percent, to 1,465.86.

Thus far, Wall Street has not exactly given Barack Obama a rousing show of confidence.  Since his election, the market has dropped over 2,000 points, largely over issues out of his control.  Since the inauguration, though, it has fallen about a third of that distance, mostly after Geithner showed up empty-handed following Obama’s promise of an actual plan to deal with the financial crisis.

Obama’s plan will provide a government backstop for homeowners who owe more than their houses are now worth.  Obama will throw $75 billion in incentives and guarantees at this issue, trying to stop a massive wave of foreclosures that will destabilize the real-estate market and could send many more people under water.  This was what Treasury and Henry Paulson originally pledged to do with TARP — buy up mortgage-backed securities to remove the threat of foreclosure and renegotiate mortgage terms as the primary lender.  Had Treasury actually done this earlier, the market may have stabilized without much more intervention at all.  Instead, they threw a lot of money at private enterprise bailouts before coming back to the actual problem.

The problem, of course, is that we have too much inventory on the market, and that requires a rational revaluation of assets.  The indicators from the housing market show this very clearly; new starts fell almost 17%, the steepest decline on record.  Why?  No one’s buying, primarily because few people can afford to sell.  Until we plumb the full extent of the bubble correction, no one will have a clear idea about the real value of their property.  Government intervention in the housing market will almost certainly thwart that, postponing rather than canceling the pain.

Mary Katherine Ham notes one of the real problems in the housing market, and a class who shouldn’t get a bailout — flippers:

According to the Arizona Republic, housing prices soared more than 55 percent in 2005 alone, and one of four sales that year was to a speculator. Phoenix real estate bloggers argued with housing bubble bloggers, blithely dismissing those who foresaw the crash as paranoid doomsdayers. The city is home to Nouveau Riche University—not a joke—a real-estate speculation program whose course offerings read like a guidebook to creating the current crisis. Learn to “Fix ‘n’ Flip” or how to buy more property with “Creative Financing!”

But the time came when the sun set on the Valley of the Sun. Today, Phoenix is not only home to families down on their luck and behind on their home payments, but people who acted irresponsibly and may be underwater on several houses. The problem is such that there’s an entire blog devoted to “Phoenix Flippers in Trouble.” Eleven of the properties listed there are in Mesa, where Obama is giving his speech today.

So, one wonders what type of homeowners the American taxpayer will be bailing out under Obama’s plan. Will he try to save only people in danger of losing a primary residence, or will he consider saving flippers part of the collateral cost of propping up the housing market? Even if he intends to keep flippers off the dole, there’s no reason to have any confidence in oversight that would actually accomplish that.

We saw the same thing in the California housing bubble in the late 70s.  People flipped houses without ever protecting themselves against even a small retraction in values, and when the inevitable happened, they went broke.  People who took those kinds of risks should assume the burden of their own bad decisions.