Lower Mortgage Rates and the $819 Billion Lie

One of the things buried within the stimulus bill is this little nugget about mortgage rates.

Republicans want to “go right at housing first,” McConnell said. They support a proposal for the government to reduce mortgage rates to 4.5 percent or lower in order to stimulate demand for housing, he said. They also plan to push for reductions in the two lowest tax rates in order “to put money back in people’s hands directly,” McConnell said.

Now, it's unclear exactly how the government will force down mortgage rates but here is one thing I know for sure. There's no way to know just exactly how much it will cost to do it. In fact, to do this part alone may cost in excess of one trillion Dollars.

Now, since the government now owns both Fannie/Freddie, it has lots of options in order to manipulate mortgage rates to 4.5% and below. Yet, none of those options have a fixed price tag. One option is to go into the marketplace and buy up enough bonds in order to drive the mortgage rates down to the level they want. Of course, it is in no way clear just how many bonds they will have to buy to do this. It's unclear just how much of a loss they would take on these bonds. It's unclear even how long they would have to hold said bonds.

The other option is for the government, through Fannie/Freddie, to simply offer 4.5% or lower even though the bonds are trading at rates that are higher. The way that Fannie Freddie normally works is this. Fannie gets mortgages at some rate and then the issue mortgages at a rate slightly lower than that. The mortgages they receive cover the rate they have to pay out. The spread between the higher mortgage rates and the lower bond rates is what Fannie/Freddie make in profit.

In this case, the government will guarantee that Fannie/Freddie take a loss on bonds for some sort of indefinite period of time. Most of these bonds are good for about five years. This means that they will take a loss on these bonds for a full five years or whatever is the period of the bond.

Most importantly, there is no way to measure just how much this will cost. If you lower mortgage rates to below 4.5%, then everyone will attempt to get a mortgage. Who knows how many millions and trillions of loans this will create? It's simply impossible for the government to guage just how much it will all cost. Furthermore, the costs will continue for years.

Now, here is the ultimate irony. This reduced rate will benefit mostly those at the top. That's because it requires a sterling credit profile now to qualify for a loan. There is typically a minimum of 20% equity required, a great credit score, and plenty of money in the bank. Such a profile is found overwhelmingly in the wealthy. As such, it will be the rest of the population that is funding the wealthy's subsidized and reduced mortgage rates. On the other hand, most of the rest of the bill will subsidize the poor: food stamps, unemployment insurance, subsidized health care, etc.

In fact, it appears the only people that aren't recipients of anything are the middle class. Those with a job, but a less than perfect credit profile, get only the $500 stimulus check. Of course, everyone gets that. Frankly, when that $500 is compared to saving several hundred dollars monthly on a thirty year mortgage, or having your health insurance paid for, it is rather measly. It's ironic that the one group that is most left out of the stimulus is the middle class the one group that President Obama says he champions.

The TARP Dilemma

President Obama is getting out front of the next round of TARP money. First, he is making sure that there will be limits to executive pay. While this is a good idea, it is largely ceremonial on its own. What really needs to happen is that financial institutions must run their businesses with significantly more discipline. Giving fat bonuses while the business is going under is just one of many ways in which financial institutions were undisciplined in the past. Only addressing this one area does little. Of course, therein lies the rub. While the Obama administration wants to see discipline in executive pay, they also want to see the same kind of lack of discipline in other areas that got us into this mess.

President Barack Obama will require banks to boost lending to consumers and companies in return for taxpayer aid from the $700 billion bailout fund, in a departure from Bush administration policy, a key lawmaker said.

“You’re going to see the Obama administration,” learning lessons from the first phase of the program, “push for much more lending,” House Financial Services Committee Chairman Barney Frank, who helped write the financial-rescue law, said yesterday on ABC television’s This Week program. “There are going to be some real rules in there.”

This idea that banks need to lend the TARP money is the crux of the problem with TARP. Banks aren't lending for several factors. First, their own capital is limited. As such, lending extends beyond a healthy level. Second, the weak economy makes them fearful of extending too much credit. Third, there aren't all that many credit worthy individuals. As such, in many ways, banks are finally performing the proper oversight over their lending policies that they failed to do during the real estate boom. Now, the Obama administration is demanding that banks stop their due diligence and throw financial caution to the wind and begin to lend with reckless abandon.

This is combined with the fact that the fed funds rate is at a quarter of one percent. As such, if banks are overextended because they have borrowed too much, they can make up the shortfall with almost no interest. If this sounds familiar, it should. This is exactly the attitude that brought us stated loans, no money down loans, and the combination there of. In other words, the Obama administration wants banks to act exactly as they acted over the course of the previous five years.

Giving banks money will NOT bring more potential borrowers into their banks. What it will mean is that banks will extend loans to more of the people that show up. Again, this is exactly the attitude that got us into this mess. There's more. The Obama administration is too smart for their own good. The seem to think they have resolved the problem I am speaking of.

As a condition of federal assistance, healthy banks without major capital shortfalls will increase lending above baseline levels,” Geithner said.

So, they'll only require this of healthy banks. First, most banks aren't healthy. Second, if a bank is healthy why is it getting any assistance at all? TARP, in effect, tries to solve the symptom and not the disease. Banks aren't lending but that is the symptom. They aren't lending for the reasons I mentioned and of course many more. Forcing them to lend before those conditions are resolved only means taking on risk they can't take at this time.

Just think about it. These banks will receive this TARP money and immediately lend it out often to borrowers well beyond their normal risk profile. Will this move the economy? Possibly, but not so much that it will reverse the trend. Will it mean their capital reserves are better off? Of course not. As such, as soon as they have spent the TARP money, they are back in the same position. Whatever short term effect TARP will have it won't change any long term dynamic.

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The Keynesian Fallacy

Jeff Jacoby has an interesting piece about the bloated stimulus. In it, he explores a fallacy not only of those that support this bill but those that support Keynesian economic policy altogether.

In the face of rapidly rising unemployment and idle productive capacity, any kind of federal spending will have a stimulus in the short run," he wrote. "Digging holes and filling them in would help to create jobs and consumer demand because those wielding the shovels would earn a paycheck that they could spend."

In other words, to the true Keynesian, any spending is good spending as long as it winds up getting to the people. Of course, if this is the case, then the stimulus, as it is currently written, isn't the best Keynesian approach there is. If you really want to truly be a Keynesian then, what you need to do is by pass the government altogether and give the money directly to the people. If it really doesn't matter how unproductively the money is spent, then just give it to the people directly. Why give it to the Department of Education, their function is to educate not create jobs. The best Keynesian use of EACH AND EVERY DOLLAR would then be to put directly into the hands of the people. In other words, a true Keynesian would say that the money should just be split evenly among the people. In other words, a truly Keynesian stimulus would just give everyone an equal stimulus check.

Think about, a defender of this stimulus says it wouldn't even matter if the government paid someone to dig a ditch and then fill it up again. If we are going to pay people to be totally unproductive, then we may as well cut out the charade as well. A truly Keynesian approach shouldn't even bother to put to work. Just give everyone money.

This is where the entire Keynesian model falls apart. Keynes believed that...

Government investment in infrastructure - the injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.[1]

Why bother with government infrastructure at all? Just give everyone money. Wouldn't that have the same stimulating effect? After all, if it matters not whether or not the work is productive, why even have people work at all?

In fact, this is the fallacy of the entire Keynesian model. It believes that government infrastructure puts money in people's pocket. In fact though, as the new Keynesians point out, government infrastructure investment is only a means to an end. It is intended to ultimately put money into people's pockets. Yet, we don't need to even have government infrastructure. We can just borrow $800 billion and spread it around the people.

This is where the entire model falls apart. The exact same thing that Keynes wants could simply be accomplished with across the board tax cuts. This, too, would put money into people's pockets. It would put that money there immediately since it would money more take home pay immediately. If the goal is to put more money into people's pockets, then government spending is a round about way of doing it. The best way is to simply reduce everyone's tax burden.

The Internet, Global Warming, and the Power of Free Markets

Back when I was in school one of the most talked about environmental threats to the world's trees from usage of paper. We were warned that our use of paper would soon deplete the world's supply of trees. Such threats to the world's trees are no longer talked about much. That's because the power of the internet means we are near a totally paperless society. Already, most everyone can see that the future of news will be paperless. Frankly, the internet allows for just about everything to be done without paper. As such, the threat to our trees from all the usage of paper is a problem of the past.

It's not only remarkable but instructive just how the internet solved a problem once at the top of every environmentalists lists of threats to the environment. That's because the internet was NOT created in order to save trees. Its ability to transform our society into a paperless one is merely a great side effect that no one involved in its creation likely ever even thought of. The internet was also the creation largely (though not exclusively) of entrepeneurs. Its roots are held in the tax cuts of Ronald Reagan of the 1980's. Reagan's tax cuts exploded the power of the entrepeneur and those entrepeneurs came up with many of the ideas that now form the bed rock of the internet.

Furthermore, the government made sure to stay away from regulating, taxing, or other wise controlling the internet. The lack of government involvement allowed the entrepeneurs free reign to innovate and expand its reach. Great ideas, like the internet, have all sorts of benefits on society and many of them are unintended. That the internet is moving our society into a paperless world is just one example of this.

We could use the same approach to solving the problem of global warming and other environmental issues. The government could stay out of the way and give entrepeneurs all the motivation they need to solve it themselves. Through a similar set of tax cuts the government could unleash the power of the entrepeneur to solve all our environmental challenges. Instead, the government feels it is a problem they must solve on their own. The government is determined to spend and to develop diplomacy toward a solution for global warming.

The government spent billions in research for decades in trying to solve the problem to the tree population by all the usage of paper. Internet entrepeneurs spent absolutely nothing on such research. They created an idea that they likely never dreamed would even solve the problem. Yet it did, and maybe that should be a lesson to all those that demand a plethora of government action to solve global warming and other environmental problems.

The Daschle Scandal Expands

I recently spoke with someone that thought highly of Nixon's Presidency. I asked him why Nixon didn't immediately go to the Attorney General and rat out all the perpetrators of the Watergate break in. He said that these were his friends and colleagues and that he felt a loyalty to protect them. Dick Morris once said something perceptive about the Presidency in this regard. Dick Morris said that Presidents need to be cut throat and ruthless. Presidents need to be able to cut their friends and loyal confidants loose as soon as they become a liability to their own Presidency. This is no easy task. No one becomes President without having a very deep appreciation for loyalty. Yet, once President, nothing is more important than the job of being President.

This brings me to the latest revelation in the scandal surrounding Tom Daschle.

Daschle reportedly waited nearly a month after being nominated to be secretary of health and human services before informing President Obama that he had not paid years of back taxes.

The Washington Post reported Sunday that Daschle paid $140,000 in back taxes and interest to the U.S. Treasury on Jan. 2, and about two days later informed the White House and the Senate Finance Committee, the White House confirmed to the Post.

In other words, Daschle held all of this information back until after being nominated. This is unthinkable and clearly shows that Daschle cares more about his own ambitions than he does about the success of the Presidency.

That's why it should be not only stunning but troubling that President Obama continues to support Daschle. Often it is in the best interest of the President to cut loose those that deserve loyalty. President Bush would have done his Presidency much good by cutting Donald Rumsfeld loose long before 2006. Here Daschle has shown he deserves no loyalty at all. Instead of expressing outrage and immediatley dropping Daschle, President Obama had dug his heals in.

As such, between the nomination of Tim Geittner and Daschle, the Obama Presidency is sending the message that tax impropriety is perfectly acceptable. That isn't new or hopeful but corrupt. This is the worst of politics. It means the powerful can get away with whatever they want and face absolutely no consequences. Both Daschle and Geittner are now a heartbeat away from the most powerful person in the world, even though both committed offenses the rest of us would have faced financial punishments that would have crushed us if we had committed.

Daschle must be removed because not removing him sends a message that the White House accepts corruption, it accepts cheating, and it accepts behavior that would put the rest of us in an untennable position. Such is not the message of a White House that stands for hope, change, and a new kind of politics.

The Red Rose

The last time I saw the red rose the pain was unbearable
Like a knife twisting in my sides, eating at my soul

I knew someday the pain would depart
That, at times, was the most painful part

In a perverse way, the pain made me feel alive
When it went away, some of myself wouldn't survive

Space and time now separated me from the rose
Memories, dreams and hypotheticals take me from smiles to sorrows

I still wonder if I could have the rose in my possession
Sometimes I smile, sometimes I'm sad, that with the rose I only had a session

Whatever I feel or felt, one thing is for sure
When in the presence of the rose, never have I felt so alive and so pure