Deep Into the Playbook

Story Highlights:

• The feds announced a new plan on Thursday to "push" mortgage rates to 4.5% and help support housing prices.
• Although the plan presents itself as an urgent fix for urgent woes, the details reveal it's on a typical government schedule—moving at a snail's pace.
• The slow pace of government can allow markets time to work things out for themselves, but too often it injects uncertainty in the meantime.

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This fall, the federal government's playbook has grown to rival many a legendary football coach's—overloaded and full of questionable trick plays. And lest fed fans everywhere grow tired of obscure plays from the back of the book, the Treasury announced on Thursday it's considering yet another economic intervention.

Perhaps encouraged by last week's dramatic decline in mortgage rates and record number of refinancing requests after the Fed said it would purchase $600 billion worth of mortgage-backed debt, the latest program targets new homeowners. Under the most recent plan, the Treasury would again use Fannie and Freddie, this time attempting to "push" mortgage rates down to 4.5% and encouraging folks to get back into the housing market. The Treasury plans to accomplish this by issuing debt at 3% to back purchases of mortgage loans from banks at a rate of 4.5%. The feds hope such a program would allow more borrowers on the cusp of buying a home to enter the market, increasing demand and supporting prices.

While it can be argued artificially low interest rates fueled the risky lending practices underpinning the current crisis, the government hopes to avoid repeating past mistakes by requiring borrowers meet guidelines set by Fannie and Freddie—primarily that they document their income and prove they can afford monthly payments. Makes perfect sense: Lend money to those who can afford to pay it back.

Maybe it will work. But even if it does, it's not readily apparent to us why or how it would help the situation today. What's hurting the financial system—and liquidity generally—is bad debt. This move is more like a backdoor economic stimulus plan. And government attempts to influence market behavior are often of little effect.

Moreover, although the plan presents itself as an urgent fix for urgent woes, the details reveal it's on a typical government schedule. Feasibly, the feds say, such direct aid to struggling mortgage markets may have to wait for the new Obama administration to take office. President-elect Obama has said he'll take action to help housing markets, but what that action is has yet to be revealed. And when it is revealed? Likely a couple more months will be spent to deliberate and implement the specifics. In some ways, it's not a bad thing the government moves at a snail's pace. It gives markets more time to work things out for themselves. But unfortunately, announcing too many programs, waffling on the details, and taking too long to act can leave markets bewildered and more than a bit frenzied.

Going deep into the playbook makes for some great Sunday afternoon entertainment, but when it comes to government quarterbacking, we'd prefer they handed the ball off to market forces.