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Walter Watts
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The GOP Has a Dumb Mortgage Idea
« on: 2009-02-05 19:55:01 » |
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Thumbs up or down thinkers?
--Walter
PS--The math seems correct to me. Am I missing something?
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The GOP Has a Dumb Mortgage Idea
By ED GLAESER
Few philosophers have done more good than Locke and Montesquieu, whose advocacy of divided government inspired America's Founders. Our history, and the less happy past of nations without checks and balances, suggests the wisdom of John Adams's statement: "a people cannot be long free, nor ever happy, whose government is in one Assembly." Today, the Senate Republicans bear the heavy burden of providing the primary check on one-party rule in America.
For that reason, it is particularly disappointing to see Senate Minority Leader Mitch McConnell embrace "providing government-backed, 4% fixed mortgages to any credit-worthy borrower" as his alternative to the Barack Obama/Nancy Pelosi stimulus package. Our nation needs Mr. McConnell's leadership, but this idea is bad economics and not a real alternative to the vision of America offered by Democrats. It also stands at odds with all that is good in Republicanism.
This massive lending program is justified as a means of boosting housing prices. But over the past 28 years, a 100 basis point reduction in the interest rate has been associated with a 4.6% increase in housing prices. Today's mortgage rates stand at 5.35%. If Mr. McConnell's proposal dropped rates by 135 basis points, history suggests that prices would rise by 6.2%. This bump would be barely noticeable in markets like Phoenix, Ariz., where prices have fallen by more than 40%, and it would do little to stem the wave of foreclosures.
Modest price effects are likely because in many markets prices remain above long-run equilibrium levels. Places like Las Vegas, Phoenix and Miami are fortunate to have few regulations that restrict housing supply. As a result, builders provide abundant affordable housing. That ensures that prices always come back to supply costs, no matter what the interest rate.
Moreover, since lenders have recovered their sanity and are once again requiring appropriate down payments, buyers are more constrained by the need to come up with 20% of the purchase price than they are by interest rates. Today's down-payment requirements and low interest rates suggests that mortgage markets are working well and have little need for governmental "help." Has the GOP forgotten the lesson of Fannie Mae and Freddie Mac? Such help often does more harm than good.
Against modest benefits, the proposed subsidy carries enormous costs. Allowing any credit-worthy borrower to gain access to wildly subsidized lending would lead to a flood of refinancing. Today, Americans owe $10 trillion worth of housing debt and own $19 trillion worth of housing wealth. Logic suggests that a 1.35% interest-rate subsidy on $10 trillion of debt could cost taxpayers upwards of $135 billion.
Subsidizing mortgages is an idea from the New Deal, not the Republican playbook. Fannie Mae and the Federal Housing Administration were set up by liberal Democrats to encourage borrowing. Subsidizing interest rates appealed to big-government interventionists because the expense is kept off federal balance sheets, at least for a while. The true costs of Fannie and Freddie were long shrouded, despite the efforts of some Republican senators. Likewise, the full costs of subsidizing 4% mortgages will appear only over time, as the government is put on the hook for default after default.
Good Republicans would emphasize the costs and fight against programs that vastly increase the size of government in a misguided attempt to distort markets. Good Republicans embrace fiscal prudence at both the public and private levels.
We are in the ruins of a housing market made worse by subsidized lending. The government has no business egging people on to borrow as much as possible to bet on housing prices. There is plenty of room to criticize the current stimulus plan, but Republicans need to adopt Ronald Reagan or Dwight D. Eisenhower, not Harold Ickes, as their intellectual role model.
One attractive, Reagan-like alternative to the stimulus package is to focus on a temporary reduction in the payroll tax, particularly for less wealthy Americans who are most likely to spend the money quickly. Such a tax cut would give people a strong incentive to work by letting them keep more of the money they earn. It would be both libertarian and egalitarian.
A second alternative is to be like Ike and embrace public investment in human and physical capital. Republicans could distinguish themselves from their opponents by insisting that investment put national interest ahead of parochial politics. Republicans could insist on cost-benefit analysis and emphasize investments that will make it more likely that the U.S. will remain an economic leader in the world.
Our country needs a robust two-party system, and the Senate Republicans are our best chance for healthy political debate. However, when they abandon economic sense and party tradition for a mortgage plan that will be wildly expensive and ineffective, they do neither their party nor their country any good.
Mr. Glaeser is an economics professor at Harvard University and the director of the Taubman Center for State and Local Government.
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Walter Watts
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Re:The GOP Has a Dumb Mortgage Idea
« Reply #1 on: 2009-02-06 00:41:18 » |
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Quote from: Walter Watts on 2009-02-05 19:55:01 Thumbs up or down thinkers?
--Walter
PS--The math seems correct to me. Am I missing something?
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Against modest benefits, the proposed subsidy carries enormous costs. Allowing any credit-worthy borrower to gain access to wildly subsidized lending would lead to a flood of refinancing. Today, Americans owe $10 trillion worth of housing debt and own $19 trillion worth of housing wealth. Logic suggests that a 1.35% interest-rate subsidy on $10 trillion of debt could cost taxpayers upwards of $135 billion.
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This calculation seems completely nonsensical. Ignoring the fact that he's treating compound interest rates as if they were simple, how does it translate into a cost to taxpayers? Is he assuming the gov't has already bought all the debt and they would be reducing rates on their own loans?
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Re:The GOP Has a Dumb Mortgage Idea
« Reply #2 on: 2009-02-06 01:31:47 » |
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The above author is a lunatic. Instead of seeing the Republicans as the source of the problem, aided and abetted by their friends the Democrats, he thinks that the system can be extended by perpetrating more of the same. Essentially transferring even more wealth to the already obscenely wealthy by squeezing the poor (the middle class has already gone whether it is recognized or not). And nobody is saying that as a (very conservative) million people are released from work on the Bush war machine, unemployment is also going to soar.
Notice that, along with Atlanta, Las Vegas and Phoenix are the most critical water supply areas in the US today. Note further that as Global Climate Change results in increased water levels, the aquifers of Florida will be affected long before the state is inundated, and this will reduce the value of all the buildings here to salvage costs only. How his model deals with this is not clear to me.
Here is an alternative perspective.
Despite their recent crash in value, American houses are in fact still vastly overvalued. They are largely built in "the suburbs," vast energy sinks with no effective mass transit, delivery or waste systems, vast distances from places of work and even greater distances from food and water sources; of insubstantial materials, vulnerable to every disaster and with projected lifespans of decades not centuries; with little or no thought to insulation or efficiency, making them utterly dependent on the ongoing affordability of energy; by hardly trained workmen, able to waste embarrassing amounts of materials. While American people by-and-large work more hours than most other people, they still don't earn nearly enough from the rest of the world to be able to afford the resources required to build and run their horrible buildings today, never mind in the fast approaching future, when the reservoirs of natural gas required to heat and cool them become uneconomic; when the oil required to process and transport building materials, food and water and for people to move from their homes to their supplies and their places of work becomes unaffordable.
The same is true to a greater or lesser extent of other countries.
The above was true before the banking collapse, triggered by greed which moved 80% of the wealth in the world to America, and 90% of the wealth in America into the hands of less than one percent of the population whose productivity is nearly non-existent. It remains true today. What has already happened in consequence is that the people of the world, through their vastly incompetent governments who seem not to realize that they know very little about economics or people, volunteered to carry the cost of the bank failures. They committed a small amount of money, in the case of the USA, less than a quarter of the cost to them of the Bush wars, to purchase bad debts, and gave it into the hands of the smartest shysters, hucksters and con artists in known history. The recipients were already sitting on almost all of the world's tangible wealth and were now accepting IOUs on the future. These geniuses took that money, have leveraged it into long term obligations worth two to three times the current global GDP, at a time when we know that world productivity has to begin falling in real terms due to increasingly common shortages of resources, although because the price of everything will rise and the value will increase, this will be hidden for a little longer; and used the money they have been given to bet against the currencies that the same governments are attempting to support. This betting is occurring via the derivative markets, hiding it from public view and creating an even greater transfer of public money and commitments to the same entities responsible for the collapse. Even though the nett transfer of value now exceeds the global value of the mortgage market, this has of course, not made funding available to anyone, indeed it has accelerated the removal of value from the marketplace. The remedy is not to do, as it seems that the USA is about to attempt, more of the same. Neither is it to invest untold amounts borrowed from the future in attempting to repair the collapsing infrastructure, failing companies or broken housing markets. After all, no matter how desperately these things need repair due to 40 years of looting of the resources needed to maintain them, no matter how well we repair these things today, they will all be made obsolete when oil demand rises greatly above supply and obsoletes the entire system.
Instead, what we need to do is refocus our attention and what ever resources we can on building for a very different future. How we do this is very significant, because it will likely make the difference between a prosperous future and any sort of future at all.
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Re:The GOP Has a Dumb Mortgage Idea
« Reply #3 on: 2009-02-06 01:39:30 » |
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Quote from: David Lucifer on 2009-02-06 00:41:18
Quote from: Walter Watts on 2009-02-05 19:55:01 Thumbs up or down thinkers?
--Walter
PS--The math seems correct to me. Am I missing something?
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Against modest benefits, the proposed subsidy carries enormous costs. Allowing any credit-worthy borrower to gain access to wildly subsidized lending would lead to a flood of refinancing. Today, Americans owe $10 trillion worth of housing debt and own $19 trillion worth of housing wealth. Logic suggests that a 1.35% interest-rate subsidy on $10 trillion of debt could cost taxpayers upwards of $135 billion.
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This calculation seems completely nonsensical. Ignoring the fact that he's treating compound interest rates as if they were simple, how does it translate into a cost to taxpayers? Is he assuming the gov't has already bought all the debt and they would be reducing rates on their own loans?
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[Walter]
In the above snip, the author simply states that a 1.35% subsidy (the difference between the current going mortgage rate of around 5.85% and the 4.5% mortgage rate that the legislators want to make available to ANY home buyer) would cost U.S. taxpayers around $135 billion PER YEAR.
.0135 x 10,000,000,000,000 = 135,000,000,000
Since that $135 billion cost is a PER YEAR additional cost, and the mortgage rates we are throwing around are compounded ANNUALLY, there is no need to make a distinction between simple and compound interest. We are not looking at the additional costs over the life of the mortgage, but only the additional costs for one year.
[David]
<snip>..how does it translate into a cost to taxpayers?<snip>
[Walter]
The only assumption he makes is that all $10 Trillion worth of housing debt would be refinanced at the government subsidized rate of 4.5%, costing taxpayers the above mentioned $135 billion per year.
[Hermit]
The remedy is not to do, as it seems that the USA is about to attempt, more of the same. Neither is it to invest untold amounts borrowed from the future in attempting to repair the collapsing infrastructure, failing companies or broken housing markets.
[Walter]
Amen Hermit.
Walter
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Re:The GOP Has a Dumb Mortgage Idea
« Reply #4 on: 2009-02-06 10:51:54 » |
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Quote from: Walter Watts on 2009-02-06 01:39:30 [Walter]
In the above snip, the author simply states that a 1.35% subsidy (the difference between the current going mortgage rate of around 5.85% and the 4.5% mortgage rate that the legislators want to make available to ANY home buyer) would cost U.S. taxpayers around $135 billion PER YEAR.
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He didn't say PER YEAR. But I said I would ignore that...
Quote:[Walter]
The only assumption he makes is that all $10 Trillion worth of housing debt would be refinanced at the government subsidized rate of 4.5%, costing taxpayers the above mentioned $135 billion per year. |
I know that's what he claims. I asked for an explanation. How is that a cost to tax payers? Financial institutions make income on the interest on loans, it is NOT a cost to them.
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Re:The GOP Has a Dumb Mortgage Idea
« Reply #5 on: 2009-02-06 13:24:49 » |
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Quote from: David Lucifer on 2009-02-06 10:51:54
Quote from: Walter Watts on 2009-02-06 01:39:30
[Walter]
In the above snip, the author simply states that a 1.35% subsidy (the difference between the current going mortgage rate of around 5.85% and the 4.5% mortgage rate that the legislators want to make available to ANY home buyer) would cost U.S. taxpayers around $135 billion PER YEAR.
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He didn't say PER YEAR. But I said I would ignore that...
Quote:
[Walter]
The only assumption he makes is that all $10 Trillion worth of housing debt would be refinanced at the government subsidized rate of 4.5%, costing taxpayers the above mentioned $135 billion per year. |
I know that's what he claims. I asked for an explanation. How is that a cost to tax payers? Financial institutions make income on the interest on loans, it is NOT a cost to them.
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When a private financial institution requires 5.85% return on their investment and the government subsidizes, or gives them the difference between a rate of 4.5% (that the borrower will pay on these low interest mortgages) and the 5.85% that they require, I consider that a cost to taxpayers.
Walter
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Re:The GOP Has a Dumb Mortgage Idea
« Reply #6 on: 2009-02-07 02:17:39 » |
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In most parts of the world, interest rates are regulated and banks still appear to thrive. Even in the US, bank rates were capped until the late 70s when the Federal government made this meaningless by allowing Interstate entities (almost all banks) to charge whatever they liked. And they do. Effective interest rates exceeding 30% pa are currently charged by all banks and credit card providers. That didn't seem to limit the number of banks nearly as effectively as total deregulation has. Bear in mind as you try to wrap your head around this issue that banks are able to borrow money from the Federal Reserve at a Federally mandated rate, the Federal Reserve interest rate, currently set at 0.25%. So banks make money by lending it. You can see that while reverting to a mandated rate might reduce banks' current usurious profits, it will not cost the tax payers any more money, unless of course the tax payers' representatives decided to subsidize the banking industry some more - probably not totally impossible given how generously the banking lobby spreads largess, and how very little it costs to purchase the loyalty and subservience of American politicians.
As I previously observed, the long suffering taxpayers of the USA have already been volunteered to adopt risks far exceeding the total value of outstanding mortgages from the banks. I still think it would have been better and cheaper, and might still be, to set lending rates and then pay off any and all outstanding mortgages and credit card debt at suitable discount rates than to keep subsidizing the banking industry. Perhaps it is a pity that their representatives omitted to charge interest on their generous gifts; but some long overdue closing of loopholes could have a very similar (and very healthy effect).
My own preferred answer remains the replacement of all existing taxes, duties and levies by a flat transaction tax (at about the 4% level), charged on all transactions except overnight deposits and inter-bank loans, combined with an alternative minimum capital holding tax (AMCHT). An AMCHT would mean that people having capital would be assessed a fraction of its value annually, but could offset this with transaction tax paid. A rate of about 5.6% would reduce the value of unused wealth by about 50% in the course of 15 years. This would act as a strong disincentive to hold capital without putting it to work. Should this system be implemented in the form of an electronic currency, then the exclusive use of such currency for all transactions would be a complete defense against charges of tax fraud. Mandating its use by politicians would largely eliminate hidden corruption.
Another benefit of this system would be that unlike the current system, the tax burden would fall equally on everyone and the Infernal Revenue Service, Federal Reserve and Banking Systems would become largely redundant. The IRS because most people would elect to use the electronic currency and as such would not even have to file tax returns, the Federal Reserve because actual transaction values could be monitored directly while cash production would be largely unneeded, and banking because money could be lent directly through the electronic currency mechanism, drastically reducing the costs of borrowing, while the AMCHT would provide a strong incentive to become an active lender.
The same electronic currency could be used to implement direct and visible subsidies to those needing them as well as schemes such as effective medical insurance and emergency medical needs funding. If it were implemented through a saturation WiMax/backup-satellite deployment effort, then the implementation would provide a substantial economic stimulus as well as a superb network for all purposes. Electronic wallets incorporating suitable biometrics could also be used as voting devices (although, arguably, all votes should be weighted by the grade achieved in a pre-vote qualifying test).
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Re:The GOP Has a Dumb Mortgage Idea
« Reply #7 on: 2009-02-07 13:34:51 » |
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Quote from: Hermit on 2009-02-07 02:17:39
My own preferred answer remains the replacement of all existing taxes, duties and levies by a flat transaction tax (at about the 4% level), charged on all transactions except overnight deposits and inter-bank loans, combined with an alternative minimum capital holding tax (AMCHT). An AMCHT would mean that people having capital would be assessed a fraction of its value annually, but could offset this with transaction tax paid. A rate of about 5.6% would reduce the value of unused wealth by about 50% in the course of 15 years. This would act as a strong disincentive to hold capital without putting it to work. Should this system be implemented in the form of an electronic currency, then the exclusive use of such currency for all transactions would be a complete defense against charges of tax fraud. Mandating its use by politicians would largely eliminate hidden corruption.
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Seems like a great idea, and one that would be relatively easy to demonstrate in a virtual world.
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Re:The GOP Has a Dumb Mortgage Idea
« Reply #8 on: 2009-02-07 13:47:58 » |
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Quote from: Walter Watts on 2009-02-06 13:24:49
When a private financial institution requires 5.85% return on their investment and the government subsidizes, or gives them the difference between a rate of 4.5% (that the borrower will pay on these low interest mortgages) and the 5.85% that they require, I consider that a cost to taxpayers.
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OK, I get it now. It will cost the taxpayers $135b in subsidies to save the taxpayers $135b in interest payments. Clever.
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Re:The GOP Has a Dumb Mortgage Idea
« Reply #9 on: 2009-02-07 17:28:15 » |
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Quote from: David Lucifer on 2009-02-07 13:47:58
Quote from: Walter Watts on 2009-02-06 13:24:49
When a private financial institution requires 5.85% return on their investment and the government subsidizes, or gives them the difference between a rate of 4.5% (that the borrower will pay on these low interest mortgages) and the 5.85% that they require, I consider that a cost to taxpayers.
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OK, I get it now. It will cost the taxpayers $135b in subsidies to save the taxpayers $135b in interest payments. Clever.
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No, it will cost the taxpayers $135b in subsidies to save only those who refinance existing mortgage debt $135b in interest payments.
Walter
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Re:The GOP Has a Dumb Mortgage Idea
« Reply #10 on: 2009-02-07 17:31:37 » |
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Quote from: David Lucifer on 2009-02-07 13:34:51
Quote from: Hermit on 2009-02-07 02:17:39
My own preferred answer remains the replacement of all existing taxes, duties and levies by a flat transaction tax (at about the 4% level), charged on all transactions except overnight deposits and inter-bank loans, combined with an alternative minimum capital holding tax (AMCHT). An AMCHT would mean that people having capital would be assessed a fraction of its value annually, but could offset this with transaction tax paid. A rate of about 5.6% would reduce the value of unused wealth by about 50% in the course of 15 years. This would act as a strong disincentive to hold capital without putting it to work. Should this system be implemented in the form of an electronic currency, then the exclusive use of such currency for all transactions would be a complete defense against charges of tax fraud. Mandating its use by politicians would largely eliminate hidden corruption.
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Seems like a great idea, and one that would be relatively easy to demonstrate in a virtual world.
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That's entirely too rational Hermit.
It'll never happen.
Walter
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Re:The GOP Has a Dumb Mortgage Idea
« Reply #11 on: 2009-04-02 01:38:07 » |
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Further on AMCHT.
Basic System
To implement this, every person in the world receives a web page based asset register. It is there to document and value assets, all assets, their acquisition and disposal.
So the owners list their assets and place a value on them.
The value can be on any basis the owner likes.
The value is used as the basis for the AMCHT calculation.
Should a government issued or approved method be used to acquire or dispose of an asset, the asset registers of buyer and seller will be managed automatically, otherwise it will be needed to performed manually.
Value Control
Anyone can can bid for any asset at any time, by lodging the bid amount with the local revenue service. The current owner can respond by increasing the value of the asset to a level greater than any bidder is likely to pay, and reiterating the last AMCHT calculation at the new value, or can transfer the item to the bidder via the revenue service, which will act as an escrow service.
Fraud Control
Anyone bidding on an item owned by somebody, but not on the owner's asset register after a 30 day grace period will be entitled to purchase the item for a fair market value less a discount based on days held/365. Note that the discount could exceed 100% and that the original owner would still be liable to recalculate (and if necessary pay) any AMCHT due.
Implementation Overhead
Aside from the first capture, which would be of the same order of difficulty as the current annual tax return in most tax jurisdictions, this would not be an onerous process for most individuals or businesses, both because use of an approved transfer method would automate the process, and because, for almost all people, the AMCHT would be much smaller than the transaction tax they would pay in a year, and as such even assigning exaggeratedly high values would not be a burden outside perhaps of insurance premiums.
Other Benefits
Clearly Such an asset register would mean that it would become much simpler to arrange and track insurance. Apropos of something, mandatory inclusion of RFID in products exceeding a certain value threshold to ease fata capture might also go a long way to reducing the market for stolen goods.
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