Feds to Flush Billions More Down the Toilet, Destroying Jobs

by Hans Bader on December 4, 2008 · 12 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk

The Treasury Department wants the federal government to effectively buy up all mortgage loans in America, by selling treasury bonds to buy up mortgage-backed securities. In exchange, lenders would have to charge a ridiculously low interest rate of 4.5% for a 30-year mortgage, which is lower than inflation in many years, and way lower than people with even perfect credit receive now.

The Treasury proposal will put taxpayers on the hook for tremendous potential losses if borrowers default, with little upside, thanks to the low interest rate. It’s the same kind of stupidity that led to the collapse of government-backed mortgage lenders Fannie Mae and Freddie Mac, which followed federal mandates to encourage “affordable housing” and “diversity” by buying up risky subprime mortgages that defaulted, and then had to be bailed out by taxpayers, even though they were already receiving billions of dollars in taxpayer subsidies.

But the idiots at Treasury think the government will actually make a profit, by issuing federal bonds (which are exempt from state taxes and carry 3 percent interest rates for 30-year terms) to buy up mortgages. Fat chance, even if you falsely assume few borrowers would default, and that all that borrowing wouldn’t drive up interest rates beyond their current low level.

And even if Feds did make a profit, it would be at others’ expense: to buy up all the mortgages, the Feds would be increasing government borrowing so much that private banks would have a harder time attracting deposits (increasing the likelihood of more $700 billion financial system bailouts in the future), and state and local governments (which are now seeking a federal bailout) would have more difficulty issuing their own bonds to pay for highways and schools. And businesses would then have a harder time borrowing money to finance expansions that could create jobs.

The Treasury Department’s proposal is a  more extreme version of the foolish policies that spawned the mortgage bubble in the first place and will have all sorts of perverse side effects.

Meanwhile, the FDIC is busy rewarding mortgage deadbeats at failed banks by cutting delinquent borrowers’ mortgage payments to 31 percent of their income (many people who are current on their mortgage pay more than that) and doing that by cutting their interest payments to 3 percent or less, rather than extending the term of their mortgage.  Fed Chairman Ben Bernanke wants to expand that program and make it even more costly to taxpayers.

dscott December 4, 2008 at 9:06 am

And that's why ultimately government bailouts, subidies and other financial meddling is self defeating. Where does all this money come from? All money from taxes and the sale of bonds come from the private sector… So what's left to invest in plant and equipment? The only way left for government to obtain more money is to print it, which they have started doing. http://conservablogs.com/publiusforum/2008/12/0….. Adjusted Monetary Base: http://research.stlouisfed.org/publications/usf….. From where did the $650 billion since September come from????

dscott December 4, 2008 at 9:46 am

Here's Fred Thompson's take on this: http://www.youtube.com/watch?v=RKc4XFK0iVY

Big E December 4, 2008 at 11:16 am

Wouldn't subsidizing all these mortgages keep demand and price artificially inflated and basically start blowing up a new housing bubble before the old one even burst?

TylerNull December 4, 2008 at 2:46 pm

How To Kill the Credit Markets — Ben&Henry's Scheme:* Fed, as THE lender, nationalizes corporate debt;* TARP isolates this debt from Fed balance sheet so Treasury still appears solvent;* Treasury auctions treasury debt (Ts) to fund TARP;* Holders of TARP's Ts, seeking safety, hoard cash to buy more Ts;* Repeat.Thus, private & corporate credit shrivels up & dies leaving the Fed to lend, and the Treasury to owe, everyone everything. Whenever I hear the federal wizards talk of their "infinite" balance sheet, it reminds me of the "Untouchables" scene where, scrawled in the victim's blood, was "Touchable". Here's it's … "FINITE".

Nancyf December 4, 2008 at 8:59 pm

The republicans are still working on shrinking the gov. so they can drown it in the bathtub. If they destroy our gov…..can we go to war on them for treason since the law won't do anything? If we have no gov. we got no law either….by necessity we will be reduced to vigilante law.

Cori December 5, 2008 at 12:01 pm

you really don't have a clue, do you?You somehow think it's going to wind up somehow better by giving "evil people" more power to govern other "evil people?"After all, don't all leftists believe all people are inherently evil, greedy and generally horrible? Wouldn't that also apply to politicians, since of course they are also human themselves… ?Unless politicians are really aliens from another planet, which I don't have much trouble believing…

Nancyf December 5, 2008 at 1:13 pm

I think they should all be required to obey the law and punished by it when necessary. Not given MORE to destroy. Bush tied the FTC's hands when it came to prosecuting crooks in business and in Wall street. What did you expect other than chaos? Maybe you will learn by experiening honest people's pain by living and walking in their shoes for a bit. Maybe sooner than you think. That what ye sow, also shall ye reap.

hoobie December 11, 2008 at 4:26 am

Benjamin Disraeli, the preeminent statesmen of the 19th century, said "when men are pure, laws are useless, when men are corrupt laws are broken". The implication there is a nation's security and prosperity aren't determined by laws, it's determined by people's character. We're becoming more lawless not because we don't have enough laws, but because each successive generation has less character than the one that preceeded it.The government we have is stupid, corrupt, and lacks efficiency in everything it does. Letting it grow bigger and unchecked is akin to loosing a retarded elephant with rabies in a shopping mall. If it keeps growing like a cancer, soon there won't be an ocean big enough to drown it in, much as we might like to.

Nancyf December 12, 2008 at 3:14 pm

I agree with your assessment of the corrupt characters we have. And yes, if men truly followed the bible we wouldn't need laws. On the other hand, much like money we can't live with gov. and we can't live without it. But, without enforcement and punishment of the law we have no Justice. And without Justice there will be nothing but chaos. Would you really like to have to sit by your door every night with a shot-gun to protect your property? 'Cause that is what we would be reduced to without any government.

bostonblacky7 December 20, 2008 at 6:19 pm


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