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There was much chuckling last week when Ben Bernanke revealed that he had tried to refinance the mortgage on his house and had been refused. Seriously, the ex-head of the Federal Reserve, someone earning $100,000′s and up for a single speech, in receipt of a very decent book advance, couldn’t in fact refinance a mortgage of rather less than his income for this year. There’s more than a suspicion that monetary policy, or at least underwriting strictures, might be more than appropriately tight just at present. Which tells us two important things about the economy and public policy. The first being that if such an obviously bankable prospect can’t borrow secured money then we really don’t have loose monetary conditions at present. We might have low rates but that really isn’t the same thing (as Scott Sumner has been trying to tell us these past years).

The second of course is that it’s barking mad that someone in Bernanke’s position would be looking for a mortgage in the first place. He’s entirely capable of paying off his current loan from his income just for this year. So, why is he, and so many like him, willing to take on the burden of a mortgage.

A 15-year loan carries a 3.36 percent interest rate this week, according to Freddie Mac Freddie Mac. And at the top federal and Washington. D.C. tax rates of 39.6 percent and 8.95 percent, the mortgage interest deduction reduces Bernanke’s real cost of borrowing even further.

Bernanke’s situation highlights a flaw in the tax code, said Harry Stein, associate director for fiscal policy at the Center for American Progress, a Washington group typically aligned with Democrats.

“He can do better investing the speaking fees in the stock market than using them to pay his mortgage and own his house outright,” he said. “I can’t imagine the public policy case for subsidizing leveraged investment for affluent people and there’s just no world in which that makes sense.”

It’s unlike a free marketeer like myself to agree with the CAP CAP but they’re absolutely correct here. The intention of the mortgage interest deduction isn’t to allow the already well off to borrow to speculate. And really thus that deduction should go. As my native UK did away with it a couple of decades ago.

For the UK there was a time that it made sense: for our old income tax system used to tax people on imputed rent. You own a house, you live in it, that’s like having an income (ie, the amount of rent you don’t have to pay) from your capital asset. So, it’s a form of income, pay income tax upon it. The other side of this system was that you got to deduct the interest you were paying on purchasing the house. The taxation of that imputed rent was abolished though: and the interest deduction carried on, unbalancing the system. As I say, it was itself abolished and while the handling could have been better (it was announced and then delayed, leading to a boom in prices just before abolition, then a slump) the basic idea was a good one.

The American aim is a little different, in that the deduction exists to encourage house ownership. But that’s probably not an aim that we should be promoting these days. It’s long been known that home ownership above a certain level increases unemployment rates (because those who must sell and then buy to move to a new job are less likely to do so than renters). And we’ve also had recent research in both the UK and US that home ownership rates are above those levels.

In short, the mortgage interest deduction leads to unemployment higher than it would be without it and also this most odd example of someone trying to mortgage so as leverage their investments. Oh, and most of the benefit of the deduction goes to those already well off. It’s probably time to curtail, if not entirely remove, the deduction.