Why should a taxpayer in Houston or Wichita bail out irresponsible California homeowners, banks and the state’s public employees’ retirement fund?

Yet that’s exactly what the Obama administration is looking to do in its latest effort to shore up a housing market that continues to sag as large percentages of Americans remain underwater in their mortgages.

The administration is pleased that California’s attorney general is now on board with the president’s multibillion-dollar bank settlement after securing tougher measures to benefit individual homeowners.

More good California-based news for President Barack Obama: Bank of America Corp. has become the first large mortgage provider in the Golden State to take part in a federally funded “Keep Your Home” program that would pay banks to reduce the balances that struggling California homeowners owe them.

Unfortunately, the federal mortgage-relief plan and the California foreclosure-aid fund are based on the same deep misunderstanding about the cause of the housing bust that led to many of the problems in the first place -- problems that were particularly pronounced in California because some policies here were worse than elsewhere. Greedy unregulated banks acted like drug pushers by enticing people to take on more debt than they could afford, the Obama administration thinking goes. This view is deeply flawed.

Houses as Casinos

The main debate among states was whether to provide more aid to individual homeowners or to provide greater latitude for states to sue these banks. There’s little discussion in the current negotiations about the role that government lending and land-use policies played in this mess or recollection about how the situation actually unfolded.

After the bubble burst, I recall asking a friend where all the money went as million-dollar tract houses lost half their value. He laughed, and pointed to his new RV -- a reminder of how prevalent it was for Californians to view their quickly appreciating houses as piggy banks. No doubt, predatory lenders engaged in fraudulent practices during the price run-up, but there’s much more to this story than that storyline.

Within months of moving from Ohio to Southern California in 1998, I noticed that home prices were rising rapidly and buyers were getting frenzied. We got out of our lease early, fearful that we would be relegated to permanent-renter status, and bought an aging $200,000 tract house. Within five years, homes like ours were selling for about $650,000.

It seemed as if everyone was refinancing, doing cash-outs, remodeling their places, buying new cars and taking Hawaiian vacations. Water-cooler conversations at work often revolved around discussions of “You’ll never guess what my house is worth.” After the crash, the same people have turned into victims, who apparently had no idea what they were doing and were preyed upon by banks.

Virtually every aspect of the lending process is governed by federal rules, so it’s nonsensical to argue that the banks were unregulated. Our political leaders seem to be forgetting, also, that it was direct government policy to arm-twist banks into giving out loans to unqualified buyers. The Community Reinvestment Act scored banks based on the number of loans they provided to low-income people.

Blame Federal Policy

As John McClaughry wrote in Reason magazine in December, “By 1995 the CRA had become a powerful tool in the hands of ACORN and allied activist organizations,” referring to the Association of Community Organizations for Reform Now. “Unless a bank could silence their protests by making (and passing on to Fannie Mae) the demanded amount of subprime loans, it faced serious difficulties in obtaining regulatory approval for branching, merging, and other corporate decisions.”

This stemmed from an ideology, supported in Republican as well as Democratic circles, that viewed homeownership as the key to a prosperous life. In pricey California, lenders -- and governments, which often offered residents down-payment assistance and low-interest loans -- got ever more creative so that they could help buyers afford median home prices that soared above $600,000 in many urban markets.

Everyone was in on the game. California wants a tougher settlement, the New York Times reported, to help the California Public Employees’ Retirement System recoup some of its losses. Calpers was on the leading edge of this nonsense, as it used borrowed money to build what later became the most upside-down community in the nation -- Mountain House, California, across the Altamont Pass in the Central Valley, where Bay Area residents priced out of their region could afford a home, provided they could tolerate the grinding commute.

If one looks at prices in most places in the Midwest and South during the inflating housing bubble, one will find increased prices and small spikes, but nothing like what happened in California.

California has some of the most extreme land-use controls in the nation. When demand increased, in less-regulated housing markets, builders were able to construct houses in a reasonable amount of time. In California’s coastal communities, it can take years to gain the government approvals necessary to build a new subdivision, so the market couldn’t respond. As a result, the stock of existing homes soared in price and builders went into the hinterlands to build new subdivisions for commuters. This is bad policy on any number of economic and environmental levels.

Jobs Come First

I don’t hear anyone proposing any policy fixes for that problem. Instead, we get proposals to help homeowners refinance their mortgages even though they have no equity in their homes, something that might save them a little money each month, but won’t do anything to solve the real problem of owning a home that is worth less than the mortgage.

The Obama administration has argued that the economy won’t revive until the home market is fixed, but the opposite is true. I own two rental houses in the Central Valley, purchased for about 25 percent of their prices at the height of the market. They receive rents that are about double the total cost of the monthly payments, yet there is an abundance of homes like this available. People aren’t buying them because they don’t have jobs and because the government rules now make it too tough to get the credit to purchase them.

Instead of bailing out bad behavior from banks and consumers, it’s time for policy makers to let the market work -- in lending, land use and economic policy. In discussing the Obama mortgage proposal, USA Today opined this week that the Republican Party’s challenge is “to come up with an alternative that goes beyond simply saying no.” But saying no is exactly what the nation needs now, especially if yes means another bailout for imprudent Californians.

(Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity. He is based in Sacramento. The opinions expressed are his own.)

Read more opinion online from Bloomberg View.

To contact the writer of this article: Steven Greenhut in Sacramento at steven.greenhut@franklincenterhq.org

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net