The New Tack

Speaking of ending a balance sheet recession, Bruce Krasting has looked at a recent CBO report and found something very interesting. The CBO is now touting a strategy for fiscal stimulus that it hasn’t mentioned before—subsidizing mortgage refinancing:

The CBO is making a very strong suggestion that ON BUDGET mortgage relief should be considered as an economic stimulus. According to the CBO this new form of stimulus would be more effective in creating (lasting) jobs than (1) Infrastructure spending, (2) Increasing aid to individual states, (3) Corporate tax holiday on foreign earnings, (4) Reducing business taxes, (5) Expanding business depreciation (6) Sustaining the Bush tax cuts and (7) Reducing workers FICA taxes.

That’s incredible! Subsidizing mortgages with federal money is a better economic stimulus than infrastructure spending? We are charting new waters with this thinking.

In addition to the shot in the arm to the financial sector and whatever contribution to income inequality than entails I think that strategy presents another problem: since most mortgage debt is owed by the top quintile, indeed, the top decile of income earners, either the CBO is proposing what is in effect a tax cut for the rich or the measure will be a lot less effective than they’re projecting it will be.

My guess is that something along these lines will sneak its way into some bill or another in the dead of night and be enacted into law without a great deal of fanfare. And we wonder why income inequality is increasing.

3 comments… add one
  • PD Shaw Link

    Hmmm, I’ve been wondering if I’m a fool for not refinancing; I guess I’ll just hold off until the government offers me a negative interest rate to refinance.

  • Tully Link

    Don’t miss this little bit of news, either. Apparently subsidizing mortgages of up to $625K isn’t good enough, so Congress is going to up the FHA guarantee limit to $730K. Because a federal agency set up to help out low and moderate income home buyers thinks that those who can afford hlaf-million-plus homes need all the government financial help they can get.

    They’re still trying to re-inflate the real estate bubble. I’m guessing the idea is that the high-end mortgages are backed by better-risk borrowers, and will thus help lower the default risk of the overall portfolio. But while it may lower the default percentages, it boosts the overall risk pool that is being subsidized. So it’s quite possible the percentage metrics will look better even as the overall actual cost to taxpayers soars.

  • I saw it,Tully,and intended to post on it but it somehow got away from me. It makes me ill.

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