Well, it looks like Obama's financial team has its head just as much in the sand as Bush's team, and more importantly, Japan's team from their ten year financial crisis in the 90s.  Tim Duy (by way of Mark Thoma) reports that Obama's plan to deal with financial crisis:

As the post points out, we tried this with Citigroup and Bank of America, and, at least by the measure of their stock prices, it hasn't worked.

Quick history lesson: 

When Japan's asset bubble burst in 1990, many banks were left insolvent with loans that just weren't going to be paid.  The Japanese government didn't insist that such banks update their balance sheets to reflect the insolvent loans.  On paper the banks were fine, but in reality they were bankrupt.  The end result was that these zombie banks lived on for years, suppressing lending and helping to keep the Japanese economy in a recession for ten years.

Apparently we are repeating Japan's mistakes as Tim Duy says:

The solution, of course, is for federal banking regulators to examine banks that look troubled, and nationalize insolvent banks.  The share holders get scalped, but what did they expect?  Once the feds clean them up, they can then sell them off for a profit when the economy bounces back. 

We did this for many savings and loans in the late 80s, but Obama's economics team seems to be avoiding nationalizing troubled banks (Citygroup, BoA, …).  Instead, the federal government will guarantee or insure the toxic assets on the bank balance sheets.  Heads the banks and their shareholders win, tails the taxpayers lose.

These folks should know they are putting good money after bad, here, but I guess they still believe their precious neoclassical economics more than reality.  Its looking like it will be a really long recession, it not something worse.

NOTE: Dollars & Sense has a partial reprint of a Yves Smith article on the same subject.  Naked Capitalism has the whole article.  Both this one and Tim Duy's are worth the read.

NPR reports that the Republicans are pushing a proposal to have the federal government make home loans at a reduced rate (say 4%) for all non-jumbo loans.  Since the mortgage rates are about 5.38% at this time, Senate Republican leader Mitch McConnell purports that:

"the average family would see its monthly mortgage payment drop by over $400 a month, which comes out to over $5,000 a year"

If the Republicans are pushing a program to keep mortgage rates low (ala 1890's Populism), then they are pretty desperate to avoid increasing government spending to build needed infrastructure like roads and help states and municipalities cover their increasing budget short falls.

However, this proposal has several obvious problems:

1. We don't need to prop up the housing bubble artificially, since it will merely sustain already high home prices that are out of whack with economic fundamentals;
2. Such a plan is a net transfer to the middle class who are able to keep their jobs and will not directly help those who are poor and/or lose their job and so cannot pay their mortgage payments;
3. With the economy in free fall, many middle class folks are unlikely to spend much of any savings they realize from these loans.  That will reduce any economic stimulus that might result from this proposal;
4. Anyone refinancing will be paying out thousands of dollars of fees for the privilege, which I suppose will stimulate the economy by paying lawyers, insurers and financiers, but I doubt many would see that as a net benefit, especially if it ends up increasing their loan amount, or reducing their savings;
5. All that said, with the economy tanking and this proposal unlikely to do much to stop that,  housing prices will continue to decline, leaving the federal government on the hook for more foreclosures.

Here are the not-so-obvious (and long-term) problems.

Firstly, the proposers suggest that the federal government will make money through this plan because the federal government is currently able to borrow at a lower rate than the rate at which the money would be lent out to home buyers (i.e. 4%).  That is a fine assumption for now since the economy is tanking, interest rates are extremely low and we are facing deflation.  What happens when the economy starts to grow again?

Since 1962, nominal 10-year Treasury Bonds rates have seldom been below 4%.  Once those 10-year TBond rates go back over 4%, this proposal starts costing the federal government money and lots of it.  I will point out that some financial institutions (say those in Iceland among other places) went bankrupt taking these "borrow at low short-term rates and lend at moderate long-term rates" bets.

Secondly, it is likely that such a program will not continue indefinitely, especially as Treasury Bond rates go up.  By keeping 30 year mortgage rates artificially low for some portion of the home-owning population, we create an incentive for people with these loans to not sell their house to move up to a larger house or to move to out of regions where jobs are scarce to where they are plentiful (though there aren't many of those now).  It they do buy a new house, they will need to get a new mortgage and if they do that, their rates will go up.  Perhaps the Republicans will also propose that we make mortgages transferable.

I am really surprised by this proposal.  I thought these Republicans believed in small government and dealing with the problems at the margin (like say for people who are being foreclosed on) rather than having expensive all encompassing solutions.  I think the Republican leaders are just desperate enough to suggest it, and hope no one looks at the details.  But that has been their playbook for a long time.

ADDENDUM: Anyone want to bet that if this proposal gets signed into law, the Republicans are going to clamor for a similar program for commercial real estate?  Anyone?