Economies: is McCain delusional?

We are no apologists for Obama. But he at least appears to think through his policies.

McCain on the other hand has a much thinner grasp of the most important topics, it appears.

It was this that makes no sense: he intends to buy up the US housing stock where there is negative equity (i.e. lending that exceeds the value of the property) and then relend on favourable terms based on the new (and still falling) value.

Let's analyse that some more.

Mr A buys a house for 500,000. He borrows 495,000 (95%). Then the price of houses starts to fall. This year, average US house prices have fallen by about 10%. So now the house is worth 450,000. Mr A is one of the borrowers that McCain says is representative of the American people - still paying the mortgage and so demonstrating that the economy really isn't as bad as people say.

The government buys his house from him / his lender for 495,000 (actually McCain hinted that it might even pay USD500,000). That means the bank has money without going to the market for it. Then the bank can lend - on fair terms - loans to people like Mr A. So he borrows 95% of the new value of the property - i.e. 427, 250.

Yesterday the Fed cut rates. But mortgage rates are still around 7.5%.

There's a simple rule of thumb for borrowing: 100,000 at 10% = 1,000 per month. It's not fully accurate for for rough budgeting purposes it works. So a 427,000 loan will cost around 3205 per month. That's going to save Mr A 3712 - 3205 = (approx)500.

So what McCain is proposing is that Mr A gets a subsidy from the government of USD500 per month for the duration of his mortgage.

For many Americans the subsidy will be far less: for a 100,000 property, it will be around USD100 per month. That is already being eaten up in inflation on food and transport costs.

What McCain has not spelled out is just what happens when markets continue to fall. He's gambling on a stabilisation of the housing market.

But more than 150,000 Americans became unemployed in September and the expectation is for a significant increase in October and again in November.

Will borrowers be allowed to go through this process again when the prices once more fall to negative equity?

Or will property valuations for the scheme factor in anticipated falls. If so, will those falls become a self-fulfilling prophesy?

On any basis except electioneering PR, the plan is quite simply ridiculous.

Transcript taken from live broadcast: "As president of the United States, I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes -- at the diminished value of those homes and let people be able to make those -- be able to make those payments and stay in their homes. It's my proposal, it's not Sen. Obama's proposal, it's not President Bush's proposal. But I know how to get America working again, restore our economy and take care of working Americans."