Thursday, January 24, 2008

The Stimulus Package

“We’re all Keynesians now” was the famous Nixon quip. Well, a “stimulus” package focused on generating consumer spending pretty much fits that maxim to a T.

The $600 to $1200 rebates for the middle classes won’t do much to spur long term investment or growth. It may or may not actually increase consumer spending, or may just go to reducing credit card debt. It’s not the long term shot in the arm that eliminating taxes on interest, dividends, or captital gains would be.

Merits of that bit aside, what’s really disturbing is the rest of the package. Anybody remember the sub prime mortgage crisis? Anybody? Anybody? Apparently, both the Bush Administration and Democratic Congress have, because they are moving to set up the next waive of defaults:

“The deal also includes a short-term increase to $625,500 from $417,000 in the size of mortgages that can be purchased and guaranteed by government-sponsored mortgage finance firms Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500). Those increased limits would expire on Dec. 31.

In addition, it would include a reform of the Federal Housing Administration.

The proposal would lower home-buyers' down-payment requirements when getting FHA loans, increase the cap on loans eligible to be FHA-insured and lower origination fees It is believed those changes could help lenders make loans to risky borrowers who have found it difficult to arrange for home financing since the collapse in the market for subprime mortgages last summer.”


So, we’re going to provide guaranteed mortgages to even more folks with poor credit and high risk of default. That’s a way to encourage responsible lending. Do you really believe that the increase the size of loans guaranteed by the government will not be extended past Dec 31? If so, I have some contacts in the Nigerian Oil Ministry for you.

This is nothing but a huge wealth transfer from the prudent to the irresponsible. And the irresponsible cohort includes both Congress for encouraging risky lending practices, as well as the banks that indulged in them.