The U.S. government is looking a bit like the management of Springfield in the latest housing “rescue” plan. This plan, floated late today, involves using government might to bring down interest rates to monstrously low levels to stimulate housing demand. From the Journal:
The Treasury Department is considering a plan to revitalize the U.S. home market that would push down interest rates for loans to purchase a home, according to people familiar with the matter. The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages.
The message is clear: cheap money helped get us into the mess and cheap money is going to get us out. This idea should be recognized for what it is; the snake to solve the lizard problem. The solution may do more damage long-term than the current problem. Pressing artificially low interest rates in the short-term will simply create a generation of homeowners who either can’t or will refuse to move because the subsidized interest rates that funded their purchase will vanish, leaving them with no hope of an equal montly payment on a similarly priced home.
The Journal confirms the worst fears by noting that the Treasury is all but admitting it desperately wants to pump back up the housing bubble:
Treasury views this plan as potentially halting the slide in home prices by enabling borrowers to afford bigger loans, thus increasing demand and pushing up home values. The lower interest rates would be available only to borrowers who are buying a home, not those refinancing a mortgage. read more
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