Posted by
Andrews on Thursday, December 04, 2008 11:24:28 PM
I have been hearing more about
the plan to drive interest rates for mortgages down to 4.5%, and it still strikes me as the worst possible response. But as it is being so heavily promoted, I have to assume it has the backing to pass. Never mind that this plan comes from the same geniuses who got us into the mess we are in now. (Unless you buy that absurd lie about "Wall Street Greed" making lenders take a loss on nonperforming loans.) The government, media and everyone in between seem to be pushing this pretty strongly, so it appears to be a bipartisan bit of foolishness. And when a measure not only enjoys bipartisan support, but is also both stupid and designed to let the government spend exorbitant amounts of money, it is almost certain to become a reality.
I already did a little analysis earlier, and I am sure I will do a more detailed analysis later. So, for the moment, I will just take a few more lines to predict the outcome.
In the absolutely best case, the loans will arrest our current liquidity crisis. They will fuel another housing boom, driving prices to even more absurd heights, making homes far out of reach of first time buyers, inflating the rental market and spurring a new wave of get-rich-quick-in-real-estate schemes. People will use second mortgages to extract value form the paper profits they mad eon their homes, and personal debt will soar. Despite the problems with rents rising and new home buyers having trouble affording houses, the press will promote the fevered inflation as economic health and credit Obama with a miracle.
Then, in two maybe three years, perhaps sooner, when the market can no longer sustain the constant price inflation in housing, when prices rise so high that only speculators are left in the market, causing the bubble to finally burst, we will see a replay of our current crisis, only worse. And, as now, I am sure most will claim to have no idea why the market is collapsing. The will blame it on real estate speculators, or Wall Street greed or the Bush administration. No one will point a finger at our unwillingness to finally face the music, and our insistence on continual inflation to avoid facing reality. And, in the end, I am sure someone will propose yet more inflationary schemes to get out of that mess as well.
More likely, the plan will not work. Investors have been burned already on housing, and banks will be leery of these secured loans, worried that Freddie and Fannie will discontinue buyback programs before banks can unload all they hold. Fannie and Freddie may get some loans out, but nowhere near what they anticipate. However, the markets will note the plan. Which means we will persist in our worsening sluggishness, while at the same time seeing prices slowly start to rise. Whatever money is diverted to these new mortgages, provided it is not completely fabricated through inflationary means, will come form somewhere else, meaning interest for industrial investment will rise slightly, adding yet another drag on the economy.
In short, we will get our own version of the "stagflation" of the Carter era. Rising prices with declining economic indicators. What comes next depends on how the government responds. If they leave it alone, the economy should stabilize and eventually recover. But that seems unlikely given their activist tone. More likely they will take recourse to the printing press, which will give us a full fledged Carter era replay, or, if they go all out, third-world style hyperinflation.
Other solutions, economic regulations, price caps, takeover of the financial sector, are all too involved to get into here. So they will have to wait for my next essay on the topic.
So, for the moment, let me close with a restatement of my conclusions. If the government follows through on artificially suppressing mortgage rates, the result will fall somewhere between an exaggerated repeat of our housing bubble and subsequent crash and a duplication of Carter-like stagflation.
We will just have to wait and see how well I do in my new role as oracle.