Exit Strategies

"Surge" or "Stay the Course?"

Depleted and demoralized by the huge sums it has already spent (and arguably squandered) trying to stabilize a still-hostile environment, the U.S. must decide its next move.

The three choices are to: 1) double down ("surge"); 2) "stay the course"; or 3) declare victory and get out.

U.S. forces in Afghanistan?

Try, the federal government and the U.S. housing market.

A partial list of all the direct and indirect financial support provided to the housing market to date includes:

--Record low mortgage rates, courtesy of the Fed's $1.25 trillion purchase of mortgages.
--Zero percent short-term interest rates, intended(?) to resuscitate the banks and promote private sector lending.
--Hundreds of billions shoveled into Fannie Mae, Freddie Mac -- and prospectively, FHA --to enable them to (continue to) fund and guarantee a huge chunk of all U.S. mortgages.
--Tax credits and incentives to home buyers, expanded and extended through April 30, 2010.
--A combination of financial incentives and political muscle designed to induce banks to modify non-performing mortgages in their portfolios.

In light of all the foregoing, the two, $64 billion (times 10) questions looming over the 2010 U.S. housing market -- indeed, economy -- are: 1) how much financial support will the government provide to housing going forward?; and 2) how long can it afford that amount?

Oh, yeah -- one last question: isn't "limited surge" an oxymoron (like "jumbo shrimp?").

Housing Multiplier Effect

"Revenue-Positive" Fiscal Stimulus

Give a too-big-to-fail financial institution $1 of taxpayer money, and what do they do with it?

As best I can tell, one of two things: 1) lend it back to the government for (risk-free) interest; or 2) borrow $10 more against it, then bet all $11 in the credit derivatives market.

Of course, that's after paying themselves $3 in compensation.

(You'll notice that there is no third choice, i.e., lend it out to creditworthy businesses and individuals.)

Housing Multiplier

By contrast, give $1 in taxpayer subsidies to a prospective home Buyer, and what do they do?

Buy a home.

Then, often times . . . buy new carpet, furniture, and appliances; hire a painter; get new landscaping, etc.

Add up all the foregoing, and you get something like $6 in downstream spending for every $1 of housing subsidy. That's what economists and accountant-types call a "revenue-positive" fiscal stimulus -- and a whale of a multiplier effect.

No wonder Wall Street doesn't understand it . . .