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A New Hope

By Matthew Yglesias  

"A New Hope"

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(cc photo by futureatlas)

Noam Scheiber describes a long ball move the White House could deploy to get around congressional obstruction of efforts to fix the economy. Fannie Mae and Freddie Mac own an awful lot of mortgages. And the executive branch owns Fannie Mae and Freddie Mac. Fannie and Freddie can simply write down the principal on the loans they’re owed—bailout—and then Treasury can “loan” them the money to cover the loss knowing full well it’ll never be repayed:

Now it’s true that congressional Republicans would never go for this. (You can imagine the White House pitch to GOP leaders: We hear what you’re saying about another $100 billion in spending. How bout $1 trillion for mortgage-debt relief?) The good news is that the administration could do it without congressional approval. Fannie Mae and Freddie Mac basically have an unlimited credit line with the U.S. Treasury, and the government has controlled Fannie and Freddie since it seized them in 2008. The mechanics would be hairy: How do you decide which mortgages to write-down? Do you only write-down mortgages Fannie and Freddie already own, or do you have Fannie and Freddie go out and buy new ones? If it’s the latter, do Fannie and Freddie eat the whole cost themselves, or do they split the losses with banks? Etc., etc. But the bottom line is that it can be done.

The far bigger obstacle is the politics. Suffice it to say, if you thought the bank bailout and the stimulus went down badly, then watch how the Tea Partiers react if the government spends a $1 trillion without so much as asking Congress. This is obviously why the administration quickly shot down rumors of a homeowner bailout when they cropped up this summer. And it’s probably why it will never happen. But before you sneer, ask yourself the following: Will Barack Obama be in better shape two years from now with the economy humming along and an apoplectic Tea Party movement, or with 9 percent unemployment and a slightly less apoplectic Tea Party movement?

I would go stronger than Scheiber. If the White House does this in 2011 it will have zero impact on the 2012 Presidential election. And it will have zero impact on the 2012 Senate elections. And it will have zero impact on the 2012 House elections. The evidence is overwhelming that absolutely nothing done in 2011 will impact 2012 elections. Conversely, the rate of real personal disposable income growth in 2012 will have a giant impact on the 2012 Presidential elections and a meaningful impact on the House and Senate elections. Which is to say that if the economic team thinks it can draw up a feasible plan here that will boost the economy they should absolutely do it.

I note that the substantive problem here is that if the US government deliberates takes on a trillion dollars in additional debt, that may lead the interest rate the US government needs to pay on its debt to rise. Rising interest rates on treasuries will increase interest rates throughout the economy and hurt growth. This is the dread “crowding out,” but it could be easily prevented by quantitative easing from the Fed. So the question is not whether the public would stand for this (they wouldn’t, but they would get over it quickly) it’s whether Ben Bernanke and the FOMC would stand for it. With inflation well below target and huge levels of unemployment and idle capacity they should stand ready to support this action but they very possibly won’t.

Note that when FDR was fighting the Depression he found the need to exploit all kinds of weird legal loopholes to take unilateral action.

The biggest problem with this idea, as far as I can tell, is that our policy guys here at CAP have some real doubts as to whether the idea is really as legal as Scheiber says. The proposal seems to have originated as a kind of paranoid “this is Obama’s secret plan” kind of thing, rather than as an actual proposal, and there are real doubts as to whether the Housing and Economic Recovery Act of 2008 actually authorizes this.

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