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.