The Obama Administration Has No More Options

Paul Krugman blasts the economy's stewards for doing nothing while the recovery shrivels. On the Fed, he skewers Bernanke for staying the course rather than buying new debt. On the Treasury, he claims that while Congress is an unmovable object, the administration still has options:

It can revamp its deeply unsuccessful attempt to aid troubled homeowners. It can use Fannie Mae and Freddie Mac, the government-sponsored lenders, to engineer mortgage refinancing that puts money in the hands of American families -- yes, Republicans will howl, but they're doing that anyway.

It can finally get serious about confronting China over its currency manipulation: how many times do the Chinese have to promise to change their policies, then renege, before the administration decides that it's time to act?

The Treasury has options. It can give more money to upper-middle class homeowners or scowl more sternly at China. In other words, the Treasury basically has no options.

As Dan Indiviglio has written, the Fannie/Freddie refinancing gambit is otherwordly. It could work and it bypasses Congress, but it has huge drawbacks and concerns. First record low mortgage rates have failed to encourage more home buying, already. Second, wealthier homeowners would benefit, but all taxpayers would be on the hook for a bigger mortgage market exposure.

Finally there are the unintended consequences. If we refinance some huge percentage of current mortgage borrowers all at once, we'll pull forward two decades of refinance demand. "This would make labor mobility even worse," Dan explained. "If you lock in a 3% mortgage rate, you'll never want to move if it means stepping up to a 6% rate." Housing market turnover would plunge and the future of the market could be even bleaker than it appears right now.