The chairman of the FDIC, Sheila Bair, has some points worth excerpting in her testimony before the Financial Crisis Inquiry Commission:
federal tax policy has long favored investment in owner-occupied housing and the consumption of housing services. The government-sponsored housing enterprises have also used the implicit backing of the government to lower the cost of mortgage credit and stimulate demand for housing and housing-linked debt. In political terms, these policies have proven to be highly popular. Who will stand up to say they are against homeownership? Yet, we have failed to recognize that there are both opportunity costs and downside risks associated with these policies. Policies that channel capital towards housing necessarily divert capital from other investments, such as plant and equipment, technology, and education—investments that are also necessary for long-term economic growth and improved standards of living.
As the housing boom gathered steam in this decade, there is little doubt that large-scale government housing subsidies only encouraged more residential investment. These policies amplified the boom as well as the resulting bust. In the end, government housing policy failed to deliver on its promise to promote homeownership and long-term prosperity. Where homeownership was once regarded as a tool for building household wealth, it has instead consumed the wealth of many households. At present, foreclosures are nearing 3 million per year and the rise of housing-linked debt has resulted in more than 15 million households owing more than their home is worth.
Those paragraphs make good sense to me. Less so her next sentence: "this is not the only example of well-intentioned policies that have distorted economic activity in potentially harmful ways. For example, the preferential tax rate on capital gains, which is designed to promote long-term capital investment, has been exploited by private equity and hedge fund managers to reduce the effective tax rate on the outsized incomes earned by the relatively few who work in these industries." It's not clear to me that it counts as "exploiting" to pay the long-term capital gains rate that the law says applies to those who take long-term risks. There are other industries that offer "outsized incomes" to "relatively few" -- professional football, for example, or movie acting. Ms. Bair doesn't target them. But she uses those criteria to target private equity and hedge fund managers, without mentioning venture capital, real estate, or oil and gas partnership managers, who are subject to the same tax rules. Since Ms. Bair regulates banks, not hedge funds or private equity funds, it's hard to see why she is weighing in here.