Wednesday, February 6, 2008

Hillary's mortgage plan

During last week's Democratic debate, I was surprised to hear Hillary Clinton's plan for the sub-prime mortgage crisis: she wanted to freeze the monthly interest rate on ARMs for five years. My instant reaction was "what a bad idea that would be". Obama responded well, essentially saying something to the effect that this would increase mortgage rates for everyone else. Economists Thaler and Woodward have a much more detailed criticism of this plan. Here's the (unsurprising) conclusion:

Undertaking such an intervention can only raise interest rates on mortgages (and maybe other interest rates as well) as markets attempt to incorporate risk premiums to cope with possible future interventions. Promising the American people that you can fix things by just lowering their interest rates is dishonest, a fairy tale that won't come true.

1 comment:

Ashish said...

Now that Mitt has dropped out, I wonder if Hillary gets the "Top Panderer" prize. Clearly she knows what she is talking about?

In fact, to quote a good friend:

"In contrast, Hillary Clinton seems totally on top of policy issues and seems to know her stuff inside out. I saw her talk here at Google (she was interviewed on stage by Eric Schmidt), and I just got the feeling that I agreed with all the policy points and priorities she made, and that she was incredibly knowledgeable."

:-)

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