Economists Thaler and Woodward Deride Clinton's Mortgage Fix Plan

Senator Hillary Clinton presents herself as a policy expert and declares her readiness to govern from "day one." But her recent prescriptions for the housing market should cause doubts for thoughtful observers.

University of Chicago economist Richard Thaler and Susan Woodward, a former chief economist at both the SEC and the Department of Housing and Urban Development, took a shot at Hillary Clinton's plan to freeze adjustable home mortgage rates yesterday. Highlights:

What would happen if scheduled rate increases were halted? Although it might make some borrowers happy, such a freeze could potentially poison the mortgage market and quickly exacerbate the slump in housing prices. If lenders and investors do not receive the interest payments they expected, they will be wary going forward. Should they avoid providing funds for adjustable rate mortgages, since the government would have just proven that the terms can be changed if difficulty arises? Should they avoid all mortgages, since the government now seems to prioritize short-term concerns for borrowers? Maybe they should avoid lending in the United States altogether? Such a policy would clearly send a dangerous message far beyond our borders. Two trillion dollars of U.S. national debt is held by foreign governments. Interest rates on this debt are low in part because foreigners trust the U.S. to pay back its loans as promised. The rates would surely be higher if its holders thought the U.S. could renege on its promises to pay. But this is precisely the expectation America would encourage by unilaterally changing the terms on $2 trillion in mortgages held by investors around the world... Senator Clinton's policy amounts to a command-and-control approach to economic policy in which the government announces prices and tells suppliers what to produce. 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.

Fairytale. Heh. Now where have I heard that line before...?