Part 1 of the plan will entail the refinancing of $1 trillion in distressed Fannie Mae and Freddie Mac mortgages. These are the mortgages currently held by the Fed and guaranteed by the Government. The refi rate would be 4%. Obama will make claim that there won't be any cost of doing this and it will produce $85 billion per year in interest savings that will "flow" back into the economy. Sounds so perfect, huh? What this plan will actually do is will create the transfer of these failing mortgage off the balance sheet of the Fed and onto the balance sheet of the Taxpayer.
In reality what Obama is going to ask us to believe is that he is so almighty that he has the ability to make 2+2=5. The part that gets 2+2 to equal 5 is free. Anyone who knows anything about mortgage finance will tell you that it would be impossible to create a new mortgage with a lower interest rate that replaces a higher-rate mortgage without the cost of doing that being absorbed by either, the investor in that mortgage in form of a haircut the investor incurs on his investment, or the homeowner in the form of a higher amount of mortgage outstanding. Impossible. 2+2 will NEVER equal 5. What's not been leaked out are enough of key details of the plan that would reveal where the true costs of this plan are buried and how these costs will be funded. The money has to either come out of the Fed's pocket, the homeowner's pocket or the Taxpayer/Government's pocket.
We know from experience that the cost will be paid by the Taxpayer. The bottom line on this plan, just like the massive TARP plan in 2008, is that Obama will ask the country to once again socialize the cost of tragically bad decisions by BOTH the big banks who made the loans and the homeowners who overpaid for a home they just could never afford in the first place. There's just no other way to look at this. The people who currently pay taxes will have money taken from their pocket and it will be redistributed first to the banks and then to deadbeat homeowners.
Part 2 of the plan is even more troubling from a Taxpayer cost-burden perspective. This idea was leaked out a couple weeks ago although it's been getting almost no attention. Obama will propose setting up an "infrastructure" bank that will be funded by the Taxpayers and then will go out and raise a large amount of debt in the capital markets that will be guaranteed by the Government but the debt won't count toward the debt-ceiling limit. The number leaked out was $1 trillion. Sound familiar? This is another version of the FAILED Fannie Mae/Freddie Mac "business" model. For a good, quick summary of the plan, read this: LINK
The goal of the "bank" will be to fund infrastructure projects in a way that creates jobs for those who want them. Again this is just another fantasy idea that will serve little economic purpose other than to transfer an enormous amount of Taxpayer wealth to the unemployed and - even more so - to the big contractors who will be awarded the projects. Get ready for a lot more traffic jams and beautiful "bridges to nowhere." This idea is set up to fail from the beginning and it's nothing but an even larger scale version of the $800 billion stimulus plan from 2009 that completely failed to create a sustainable economic recovery BUT it succeeded in ramping up the Taxpayer debt load by another $800 billion.
Please note: in the 3 years that Obama has been President, the outstanding amount of Government debt has increased by 40%. Nominally that number is $4 trillion. But wait, as I was discussing with someone last night, Obama also added $7 trillion in Fannie Mae/Freddie Mac debt to the Treasury debt-load, but this is still counted as "off-balance-sheet." I guess because there is hope that one day the housing market will recover enough to start paying off that debt. BUT, in reality, the Taxpayer debt burden under Obama has actually climbed - not from $10 trillion to $14 trillion - but to $21 trillion when you include the FNM/FRE debt, which technically needs to be included.
There's a statistic compiled by the IRS that shows 54% of the population is expected to pay 100% of the Federal taxes paid by individuals this year. Think about what the means for a minute. If you are one of the 46% of the U.S. population who does not pay taxes, you don't care if the Government spends money like Obama is proposing because it doesn't come out of your pocket. It's not food taken away from you or your family and given to someone else. To me that is a stunning reality about how badly the incentives are skewed in our system and it's why the Government can continuously implement spending programs that transfer wealth from the the Taxpayers to non-taxpayers and the elitists with little resistance from the masses: FORTY-SIX PERCENT of the country either benefits directly from this wealth transfer OR does not help to fund it or both. Think about that if you are one of the 54% who actually pays taxes.
I recall that in 2002, when a close colleague and I were discussing how we thought the collapse of the system would unfold. So far what we outlined has largely unfolded, only it's taken several years longer to occur than we originally envisioned. I remember him saying that "eventually we are going to see things that will blow our mind." I can truly say that the way the last three years under Obama have unfolded - and the incredible, tragic acceleration in fraud and massive theft of middle class wealth enabled by him - has truly blown my mind.
Be prepared because it's going to get a lot worse.