I think this is an interesting strategy under the circumstances. If the Treasury can issue enough 30-year paper at 3% and turn around and collect 4.5%, that’s a positive spread of 1.5%. Realistically, credit and operating costs will eat up the 1.5% spread over time, but break-even under the circumstances is pretty good. And, hell, the assets and liabilities would even exhibit matched durations. Holy asset-liability management!
So, govt. debt would increase but assets would increase as well, so net debt-to-GDP would remain constant, which is a good thing. There should be no additional ongoing net costs to the taxpayer so long as the credit costs and operating costs remain in check, which is a reasonable assumption given dramatically lower home prices.
I assume they’d use Fannie and Freddie to administer the whole thing because that would be the most efficient manner of handling things – they’re already set up for this type of operation.
The issue is how to determine who gets the loans, because everyone – including folks like me who have no issues with their mortgage payment – is going to want to participate. That’s going to be a tricky issue.
But the idea itself is solid. I think the Officialdom now realizes that housing prices are going to continue trending down until they’re back to trend relative to incomes and rents. They’re resigned to that fact. I think what they’re trying to achieve now is some mechanism for not allowing prices to go too much BELOW that trend. Because we’re staring a depression in the face if proper actions aren’t taken. And this is an interesting idea that shouldn’t burden the taxpayer too heavily if administered properly.
I give it an A for ingenuity. Let’s see how the execution is.
