There’s been much said today about the Treasury’s “plan” to force mortgage rates down. Since no government agency actually has the authority to “control” mortgage rates directly — not even the Federal Reserve! — it would have to be done indirectly through the purchase of mortgage backed securities.  A whole lot of mortgage backed securities.  That “demand” would drive the price of such securities up, which in turn makes the interest rate go down like any other bond.

This reduced interest rate would theoretically stimulate demand during our current “housing recession.”  Mr. Bernanke seems to be all for anything that would stimulate housing demand and/or reduce foreclosures.  There is much reason to be skeptical that this will work. Even Mr. Obama has gone on record as saying ”The deteriorating assets in the financial markets are rooted in the deterioration of people being able to pay their mortgages and stay in their homes.”  They both agree that it would be great if people could pay the mortgage, but I think they may disagree on whether the answer is lower mortgages or higher wages! 

By far, the best criticism I have seen of the Treasury plan is by Tom Vanderwell over at BloodhoundBlog.  He articulated my question, “How exactly is that supposed to work?”  Here’s the meat:

Okay, not to rain on everyone’s parade, but let’s take a logical look at the numbers and the statistics behind it.

1. What’s the only way possible that I’m aware of to lower mortgage rates?  By raising the price of mortgage backed securities which lowers the rates on them.   Lower rates on mortgage backed securities equals lower mortgage rates.
2. How do you increase the price of mortgage backed securities?  The only way that happens is by increasing the demand for them.
3. How do you increase the demand for them?  Have the government step in and buy a HUGE (I’m talking many many many zeroes!) amount of mortgage backed securities off of Fannie and Freddie.
4. How is the US government going to come up with that money?   All joking about printing presses aside, in reality, they are going to have to borrow the money.
5. How do they borrow the money?   By issuing a LOT of US Treasury bonds to finance their purchase of mortgage backed securities.

So, what happens with the price of US Treasuries if suddenly there’s another $1 Trillion on the market?

• Demand stays the same
• Supply goes way way up because the government is flooding the market with more debt.
• Price goes up down because there is more supply than demand.
• Rates go up.

So this looks very suspiciously like yet another plan where the Government throws money at the financial institutions that helped make this mess worse than it had to be, and hopes everything magically gets better. 

Here’s a trio of bonus items for you today:  the Feds have a new set of financial literacy websites that can help you learn about such important topics as financial security, home ownership, consumer credit, and other topics (go to it directly by clicking this link!);  copper theives are hitting lots of soft targets and causing lots of problems, but this article fails to mention empty houses! (Realtors, please check on your vacant listings regularly… and if you see something amiss in somebody else’s listing please let the other agent know!);  and a micro-loan fund to help entrepreneurs in third world nations is being run by students at Vegas’s Meadows School.