A sure sign of a dysfunctional market economy is the persistence of unemployment. In the United States today, one out of six workers who would like a full-time job can't find one. It is an economy with huge unmet needs and yet vast idle resources.

The housing market is another U.S. anomaly: There are hundreds of thousands of homeless people (more than 1.5 million Americans spent at least one night in a shelter in 2009), while hundreds of thousands of houses sit vacant.

None of this is news. What is news is the Obama administration's reluctant and belated recognition that its efforts to get the housing and mortgage markets working again have largely failed.

Curiously, there is a growing consensus on both the left and the right that the government will have to continue propping up the housing market for the foreseeable future.

It is an understandable position: Both U.S. political parties supported policies that encouraged excessive investment in housing and excessive leverage, while free-market ideology dissuaded regulators from intervening to stop reckless lending. If the government were to walk away now, real estate prices would fall even further, banks would come under even greater financial stress and the economy's short-run prospects would become bleaker.

But that is precisely why a government-managed mortgage market is dangerous. Distorted interest rates, official guarantees and tax subsidies encourage continued investment in real estate, when what the economy needs is investment in, say, technology and clean energy.

Current U.S. policy is befuddled, to say the least. The Federal Reserve Board is no longer the lender of last resort, but the lender of first resort. Credit risk in the mortgage market is being assumed by the government, and market risk, by the Fed.

The government has announced that these measures, which work (if they do work) by lowering interest rates, are temporary. But that means that when intervention comes to an end, interest rates will rise -- and any holder of mortgage-backed bonds would experience a capital loss -- potentially a large one.

Resuscitating the housing market is all the more difficult for two reasons. First, the banks that used to do conventional mortgage lending are in bad financial shape. Second, the securitization model is badly broken and not likely to be replaced anytime soon.

Securitization -- putting large numbers of mortgages together to be sold to pension funds and investors -- worked only because rating agencies were trusted to ensure that mortgage loans were given to people who would repay them. Today, no one will or should trust the rating agencies or the investment banks that purveyed flawed products.

In short, government policies to support the housing market not only have failed to fix the problem, but are also prolonging the deleveraging process.

Corporations have learned how to take bad news in stride, write down losses and move on, but our governments have not. For one out of four U.S. mortgages, the debt exceeds the home's value. Evictions merely create more homeless people and more vacant homes.

What is needed is a quick write-down of the value of the mortgages. Banks will have to recognize the losses and, if necessary, find the additional capital to meet reserve requirements.

This, of course, will be painful for banks, but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy.

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