Ways the U.S. Government Could Use Free Money

Right now, the U.S. Government can borrow money at zero cost; the interest rate on 10-year Treasury bills is hovering around the inflation rate. In fact, some days it is less than the inflation rate, meaning the government can make money by borrowing. We could do all sorts of things with that free money, like build a high-speed rail network or a few hundred new community colleges. Republicans, however, would not allow those investments. But how about this idea, as explained by Mathew Yglesias:

Senator Jeff Merkley of Oregon is out today with an ambitious plan to try to stimulate the economy by facilitating large-scale refinancing of so-called underwater mortgages. This is important because one way that low interest rates can help in a weak economy is that people with mortgages on their homes take advantage of the opportunity to refinance and boost their disposable income. This channel hasn't worked very well during the current crisis because lots of homeowners are "underwater." That means the underlying asset they own—the home—is now worth less than the amount they owe the bank for the loan that bought them the home. . . .

Merkeley's proposal is to set up an entity—comparable to the HOLC of the New Deal—whose purpose is to borrow a gigantic sum of money from financial markets at today's ultra-cheap US government cost of funds, and then buy up all the outstanding underwater mortgages that are out there. Then the new entity will offer each underwater homeowner one of three refinancing options: 1) A plan that keeps your monthly payments roughly constant but shortens the life of the mortgage; 2) A plan that cuts your monthly payment by just extending a new full-length loan at a lower interest rate; 3) A plan that cuts your monthly payment a lot by in effect extending the life of your loan. The logic here is that individual household needs vary. . . .

How to pay for this? Well if you read the plan you can see the detailed explanation, but the main component is simply that we'll be exploiting the gap between the federal government's extremely low cost of funds and the very high rates that a lot of underwater homeowners are currently stuck with. You can offer households a much better deal than they currently have while still lending at a profit.

The only cost would be the losses through default, and since the government has lots of ways of getting people to pay money they owe, those ought to be modest.

I think this is a great idea. Nobody is getting anything for nothing; people with underwater mortgages are just getting the same chance to refinance that many people with above-water mortgages are already taking, and they still have to repay every cent of the loan. The government might even make money (as they made money on many parts of the banking bailout). Of course, all of this means that Republicans in the House will kill the whole plan, since they can't stand the thought that the Democrats might do something to actually help ordinary Americans. Or am I too cynical? I would certainly amaze me to see the parties work together on such a simple, helpful idea.