I have often wondered about the sensibility of methadone programs. I happen to take methadone as a pain medication, so I do know something about the effects of the drug. Now, I think I understand the logic. Methadone lacks the euphoric "rush" that addicts claim to get from IV injections (and which I have felt when receiving IV morphine in a hospital), methadone does not produce that short-lived euphoria. Methadone is also very long acting, so they need only administer it daily.

However, I am a bit suspicious of claims that methadone "does not get you high", as the drug still clearly produces some lethargy and confusion. And my belief is supported by the fact that drug users often try to smuggle out methadone to sell on the streets. Were it only useful for staving off withdraw, I doubt so much effort would go into sneaking it out for resale. And, if the claim of "not getting you high" is suspect, the claim that methadone withdrawal is "easier" is utterly untrue. I have experienced withdrawal symptoms (either when discontinuing a medication, moving to a smaller dose, or when forgetting to take my medication) from oxycodone, morphine, and methadone, and can attest that all are about equal in their discomfort. Methadone offers no advantage in that respect.

I suppose the truth is, methadone offers one big advantage. It keeps the drug users from feeling the effects of withdrawal, and allows this with only a daily dose of methadone. This allows the treatment center to slowly taper down the dosage until they finally wean the addict off opiates. And if the most vocal proponents would just say as much, I would have many fewer objections. But, as in many cases, the efforts to oversell the benefits of methadone make me see a somewhat beneficial program as suspect.

However, whatever you think about methadone treatment programs, or the even more controversial "containment" programs in some nations, where addicts are supplied by the state with their drug of choice in a control dosage in order to keep them from roaming the streets committing crimes to feed their habit, I think we could all agree that a program which treated heroin addicts by administering ever increasing doses of opiates would be a bad idea.

Which is my rather round about way of getting us to our main topic. The economy.

You see, we are about to institute a program which amounts to trying to cure heroin addicts by giving them increasing doses. Oh, of course it is sold with high sounding rhetoric, but in reality it amounts to more of the same dressed up as  an emergency measure forced upon us by the "crisis". Were I paranoid I would suspect that it was an effort by the Bush administration to get a bit of revenge by creating an impossible situation for the incoming president, but I know Bush is too sincerely patriotic to do something that petty, and, even were he not, as idiotic policies nearly identical to this one have been pushed by both parties, it is clearly a sincere conviction on the part of politicians that this "hair fo the dog" solution is a good idea.

So, what is the program?

I first heard mention last night while sitting in a car listening to talk radio. During a news break it was announced that there was  a plan afoot -- I believe being floated by the Treasury Department, but I don't recall clearly who is pressing it at this moment -- to try to "shore up ailing housing markets"*. And the solution? To use Fannie and Freddie to "drive down interest rates", and quite aggressively too. Unlike Federal Reserve adjustments tot he prime, where a half point move is considered radical, the plan is to drive rates down by a full point.

First, let us be honest about what this means. INFLATION. That is spelled I-N-F-L-A-T-I-O-N. Yes, in a time when we are suffering from the consequences of past inflation, both the explicit inflation used by the Clinton and Bush administrations to shore up sagging economies, and the implicit inflation caused by the massive credit expansion of the massive subprime lending fiasco, we are proposing yet more inflation as the cure. Granted, the problem at this instant is the deflationary pressure caused by many loans suddenly becoming worthless, but piling on more inflation will, at best, simply push this problem a few years into the future. More likely we will still face the same liquidity crisis and economic decline, but with the addition of soaring prices.

Inflation? some of you may ask. How is this inflation?

Well, I admit it is not the normal inflation we see when the Fed is forcing down rates. In those cases, the Fed creates money, or credit, which drives down all interest rates. In this case we do not have that. Instead we have a targeted rate reduction. But that does not make it any less inflationary. The only way Fannie and Freddie can "encourage" lower mortgage rates is by promising to insure such loans, or by buying them up at a premium. In short, by applying exactly the same pressures they applied to create the subprime fiasco. However, instead of encouraging risky loans, they will now be encouraging mortgages that have unprofitable yields. Still, the outcome will be the same, by buying up such loans, Fannie and Freddie will be effectively creating new credit, which is an inflationary force. There is simply no other way to drive down interest rates.

Let's make this very simple. At a given demand and a given supply, interest will always be X. To get it to drop to Y, you must either reduce demand or increase supply.There is no way the government can decrease demand using Fannie and Freddie, so their only choice is to increase supply. They do that by agreeing to buy up a certain amount of loans, which effectively means they are making those loans themselves. As Fannie and Freddie are not lending institutions, any loan they make is not backed by assets, and thus, in terms of fractional reserve banking, these are effectively unsecured loans. Fannie and Freddie are creating money by purchasing these loans. Granted there is a lot of juggling of money between Fannie, Freddie, the Fed, the government and others, but, in the end, the only way to drive down rates is to create credit out of nothing, and that is precisely what this is intended to do.

So, we are faced with outcome of massive inflation, and, rather than let it work itself out, we are proposing still more inflation. Nor is this the first inflation. We have already inflated again with the supposed "bailout". The bailout was not financed by decreased spending or new taxes, it was financed by borrowing, which make sit yet another increase of the money supply. So, on top of that we are adding the money supply inflation represented by this effort to drive down mortgage rates. That is about the worst solution anyone could propose.

Now, I will admit that inflation may temporarily ward off the worst results of a crash. But it does so in the same way drinking can overcome a hangover. It puts off the symptoms, but the problem is still there, and getting worse. We already tried inflating our way out of a problem when Clinton used massive inflation to keep at bay the worst of the dot-com crash. And Bush did the same during the post-9/11 slump. And we are now starting to face the effects of those inflations. And yet we seem to be saying, rather than face the music we would much rather put it off and face an even worse outcome later on.

But, let us ignore for a moment the big picture, the overall economic impact, and ask, even if successful, what would be the effect of decreased interest rates.

Basically, what we saw before the crash. As with any good, when prices are artificially low, people will use too much. In other words, people will borrow more. Considering how many politicians decry our tendency to "borrow too much" it is bizarre how many propose low interest rates a the solution. Don't they understand we borrow so much precisely because interest is kept low? Even if limited to home mortgages, low interest will encourage debt. Not just debt to buy homes, or to get out of bad ARMs, but second and third mortgages used to extract equity from houses, to pay down credit, to buy investment properties, whatever. People will borrow more, as borrowing will be comparatively cheaper than other uses of money.

And, with cheaper money, and that money tied to properties, people will see housing prices rise once again. And that will, in turn, cause a rise in people using the housing market for speculation. We will see the revival of the "flipper" and the same get rich quick schemes we saw for the past several years. And, on the negative side, we will also see first time home buyers once again priced out of the market, and people, seeing low interest rates, gambling on continually rising house prices, diving into risky ARMs.

In short, we will be setting ourselves up for a new housing bubble, which will once again burst, putting us right back where we are today, except with even worse consequences, as the prices will have risen even higher and will drop even more. In other words, we are not "solving" anything, we are just putting off the consequences by making them even worse when they eventually arrive.

Of course, that assumes that the plan works as intended. As it is limited to mortgages, and we are facing a liquidity crisis in the financial sector, more likely the effort will not have the intended consequence. Instead it will allow a few to engage in risky borrowing and put off their own personal problems while the overall economy continues to decline.It may lead to a slight bump in prices as the new money trickles into the economy, but overall it will probably do little but elevate prices.

That is, provided it is a one time thing. Should they decide the plan didn't work due to a lack of commitment, and continue pumping money into the market in an effort to "prime the pump", to use an FDR-ism, then we could see truly disastrous results. Rather than a simple rise in prices, continual infusions of cash could bring about Carter-like "stagflation", constantly rising prices paired with sinking growth numbers. It is doubtful that mortgage rates alone could bring about Wiemar style hyper inflation, but it definitely could do enough harm that it qualifies as a truly bad idea.

Then again, given the current climate, as well as the public belief that government is the cure to all ills, while all our current problems are the outcome of "greed", I have no doubt this bad idea will become law in some form or another. All I can do is hope they give up on it before it does too much harm.

------------------------------------------------------------------

* Has anyone noticed how certain bits of boilerplate have come to have no meaning? "For the children", "shore up the ailing housing market", "save the middle class", "prevent foreclosures", "rescue beleaguered small businesses", and so on. They are interchangeable. Any program can be justified by any one of them. At least in this case the solution and the justification are related. However, had they said ti was to "save the middle class" or even it was "for the children", people probably would not have batted an eye, as we are so used to hearing those phrases, we no longer think about them, don't even consider if they make sense. We hear them and just assume the politicians have some justification for what they are doing.