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?

The New York Times has a set of graphs on the cost of the wall street bailout so far, both in dollars spent and in pledged.  So far, $1363 billion dollars has been spent.  $7.8 trillion, i.e. $7800 billion, has been pledged. 

To give you an idea as to how much that is, the US debt is over $10.6 trillion and total US government spending in 2007 was about $2.7 trillion.

Thanks to The Big Picture for the link to the NYTimes.

I wish President-elect Obama, and all of us for that matter, good luck.  One study states
that Massachusetts' unemployment rate will rise from 5.5% now to well
over 8% in Q3 2010.  With the US unemployment rate currently at 6.5%
and the broadest measure of Un/Underemployment, aka U6, at over 11%, Q3 2010 will be an unpleasant place for US workers.

Looks like the best policy is a massive increase in federal government spending on public infrastructure, energy conservation (someone has to install energy efficient windows and insulate homes), aid to states and localities, a health care system that covers everyone (oh say single payer), etc.

Krugman thinks that $600 billion of deficit spending is enough.  If the auto industry goes into bankruptcy, I can see needing much more than that, likely even if they don't, what with the rate at which the economy is falling. 

That said, I am not convinced that bailing out the big three automakers is a good idea, at least not without getting rid of upper management.  After all, these are the same folks who got themselves into this mess.  When the bailout is four time the market cap of the big three, perhaps the US government should just buy them.  Heck, the UAW and AFL-CIO might have enough in their strike funds to buy a good chunk of them.  51% and the unions get to call the shots and really make upper management's heads roll.

I saw this back in October, but have been too busy to post, what with Cynthia McKinney's campaign, work and family. 

Doug Henwood reported this set of statistics about the distribution of wealth in the US in 2004.  By 2007, it was likely even more skewed to the wealthy than these numbers are.  For 2008, perhaps, it is less so.  However, while I have a feeling the wealth of those 10% with the most wealth have fallen noticeably, what with stock market falling 50% from its high, I have a feeling that the half of the population with the least wealth, have seen their wealth actually go negative since the housing boom went very bust.

What this table shows is the value of assets (Residential – i.e. home(s) & Nonresidential – i.e. stocks/bonds/etc.) owned by different segments of the US population in 2004.  The first row is the average over the whole population.  0-50 is the 50% of the US population with the least assets, etc.