$700 Billion later, there is no clear way out of our current economic crisis. $700 Billion is but a band-aid. The root of our current crisis revolves around falling housing prices. Normally I would never advocate that the government act to prop up house prices, but these are far from normal times. If nothing is done on this front, $700 Billion will be but a spit in the bucket. So, since nobody seems to be offering a solution, I'll give it a shot.
The single fastest way to firm up housing is to make it more affordable on a monthly basis. The fastest way to do that is to influence or subsidize low interest rates.
The current rate on a 30 year fixed rate mortgage is 6.375%. This number is far too high to encourage anyone to take a risk. The spread between the 30 year mortgage and the 10 year Treasury is extraordinarily high. Good thing that the taxpayers own Fannie and Freddie now. The first phase of my solution is simple. Fannie and Freddie should be ordered to reduce the spread and offer mortgages at 5.25%. Fannie and Freddie conventional limits should be expanded to 800k for the foreseeable future. All loans should require 20% down to qualify.
Further, the Federal government should further subsidize the purchase of homes by offering a 4% cash credit towards buying down rates for new homeowners willing to put the 20% down. On average, this buy down would lower the effective interest rate to 4% for new buyers. The 4% cash credit can be phased out over time as the housing market stabilizes and improves. Fannie and Freddie would fare very well under the plan as 20% down would provide a strong cushion and the low monthly payments would greatly reduce the risk of default.
Such a program would have nearly instantaneous benefit to housing demand and prices and as importantly, stop the massive hemorrhaging from highly leveraged securities which are causing the international credit and financial crisis. Such a plan would be costly, but it would be much less costly than a recession that compounds the current issues and quickly devolves into a death spiral.
This is an idea in progress and it is certain to be amended. The markets need to be reformed and actions must be undertaken to make sure that large banks and brokers are never, ever, given the chance to run up 40-1 leverage ratios again. Reviewing and regulating these markets will be a massive time consuming task. We need action now.
Feel free to sound off and throw in your two cents.