International Herald Tribune, Feb 4, 2008
The permanent income hypothesis (PIH) is a theory of consumption that was developed by the American economist Milton Friedman. In its simplest form, PIH states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term income expectations.
Measured income and measured consumption contain a permanent (anticipated and planned) element and a transitory (windfall gain/unexpected) element. Friedman concluded that the individual will consume a constant proportion of his/her permanent income; and that low income earners have a higher propensity to consume; and high income earners have a higher transitory element to their income and a lower than average propensity to consume.
Mortgages
* An exclusion of all co-op apartments, which make up 75 percent of residential homes in Manhattan and a substantial portion in the other boroughs.
* An exclusion of two-family homes, of which the city has more than 400,000.
* Restrictions on cash-out refinancing.
But most shocking is that the interest rates for mortgage loans from $417,001 to $729,500 are much higher than expected - and, brokers say, than the average rate of those seeking to lower their monthly costs.
Experts had counted on about a 6 percent interest rate extended for loans up to $729,750. Instead, rates for stimulus-package loans above $417,001 were listed late last week as high as 6.85 percent - which seems to go against the spirit of the information initially released about the plan.
Beginning in the late 1950s New Classical Macroeconomists began to disagree with the methodology employed by Keynes and his successors. Keynesians emphasized the dependence of consumption on disposable income and, also, of investment on current profits and current cash flow. In addition Keynes posited a Phillips curve that tied nominal wage inflation to unemployment rate. To buttress these theories Keynesians typically traced the logical foundations of their model (using introspection) and buttressed their assumptions with statistical evidence. [4] New Classical theorists demanded that Macroeconomic be grounded on the same foundations as Microeconomic theory, profit-maximizing firms and utility maximizing consumers.[5]
The result of this shift in methodology produced several important divergences from Keynesian Macro economics: [6]
The financial relief comes from the redefinition of jumbo loans, a category that includes all mortgages greater than $417,000.
Because area home prices are so high, jumbo loans have often been the only option for buyers. But such mortgages carry interest rates of at least half a percentage point more than smaller loans.
Federal law has barred Fannie Mae and Freddie Mac, the two companies that buy loans from lenders and sell them to investors, from buying loans of more than $417,000. Because lenders have no guaranteed market for their bigger mortgages, they assume more risk - hence the higher rates charged on loans over $417,000.
Under the proposed stimulus plan adopted by the House last Tuesday, Fannie Mae and Freddie Mac would be permitted to buy loans of up to $729,750
International Herald Tribune, Feb 4, 2008
That extra money can make a huge difference in affordability.
Monthly payments on a 30-year fixed-rate mortgage of $625,000 at an interest rate of 6.25 percent - the average jumbo rate in late January - would total $3,848.23. The same loan at the nonjumbo rate of 5.5 percent in late January would cost $3,548.68 a month, a difference of $299.55.
Michael Daversa, president of Atlantic National Mortgage, a brokerage firm in Westport, Connecticut, said he had already received calls from borrowers who wanted to refinance their current loans at the nonjumbo rates, even though it is not yet known if the new loan policies will get final congressional approval.
Increasing the eligible loans to $729,750 from $417,000 would change the characteristics of mortgage-backed securities, leading traders to exact a premium for increased interest-rate risk.
Borrowers with large, jumbo loans are more likely to refinance since their savings are greater for each incremental drop in rates than for a smaller loan. The loans will taint the bonds since traders don't initially know the make-up of the securities known as "agency" MBS.
Con - History
CBO
TESTIMONY
Statement of
Peter R. Orszag
Director
Options for Responding to
Short-Term Economic Weakness
before the
Committee on Finance
United States Senate
January 22, 2008
■ | There is a strong possibility of at least a few quarters of very slow growth. Although the economy may avoid a recession in 2008, the risk of a recession has risen. |
■ | The Federal Reserve has powerful tools to keep the economy growing, but there is no guarantee that it will be able to keep the economy from entering a recession. |
■ | The system of automatic stabilizers built into the federal budget will act to stimulate the economy in a period of economic sluggishness, helping to mitigate any economic downturn. |
■ | If additional fiscal stimulus is deemed necessary, it would be desirable to make sure that the actions take effect when stimulus is most likely needed and are designed to increase economic activity as much as possible for a given budgetary cost. Such well-designed stimulus can help bolster an economy suffering from weak aggregate demand and thereby help reduce the risk and severity of a recession. |
■ | The most effective types of fiscal stimulus (delivered either through tax cuts or increased spending on transfer payments) are those that direct money to people who are most likely to quickly spend the bulk of any additional funds provided to them. |
Business.
The package includes more than $40 billion in business tax breaks, including allowing businesses to more quickly deduct the cost of new equipment. The package provides a 50% bonus deduction on new equipment during the year it is put into service, with some exceptions. It also allows faster expensing of property in some cases.
Republicans say previous similar measures brought about a 4% increase in business spending in the first six months they were in effect. The non-partisan Congressional Budget Office in a recent analysis said the impact of such tax breaks was "relatively modest."
Kent Bentsen, president of the Equipment Leasing and Finance Association, which not surprisingly liked the plan, noted that investment in plant, equipment and software made up 15% to 17% of economic output.
Housing.
The plan tries to make it easier to secure or refinance mortgages for more expensive homes. First it would allow Fannie Mae and Freddie Mac, for a year, to buy loans of up to $729,750. The current limit is $417,000. The package would similarly increase the $362,790 limit on loans insured by the Federal Housing Administration, while making it easier for borrowers to qualify.
The market for bonds containing so-called jumbo loans, those above Fannie and Freddie's current $417,000 limit, has essentially dried up in recent months due to turbulence in the mortgage market. Lenders making such loans are requiring even borrowers with good credit to come up with larger down payments and are charging higher interest rates. That's a particular problem in states like California where the median existing home price is about $490,000.
Richard Moody, chief economist at Mission Residential, says he's skeptical as to how much good raising the Fannie and Freddie limits will do, given lenders' recent, tougher standards.
"When you're talking about a $700,000 house, a 20% down payment is still a good chunk of change," Moody says.
Further, the plan shifts more risk to taxpayers, because FHA loans are insured by the federal government.
• Gross domestic product grew at an annual rate of 1.7 percent in the six quarters before the 2003 tax cuts. For the six quarters following the tax cuts, the growth soared to an average 4.1 percent rate.
• Non-residential, fixed investment declined for 13 consecutive quarters before the 2003 tax cuts. It has expanded for 13 consecutive quarters since then.
• The S&P 500 dropped 18 percent in the six quarters before the 2003 tax cuts. It increased 32 percent over the next six quarters.
• The economy lost 267,000 jobs in the six quarters before the 2003 tax cuts. In the next six quarters, it added 307,000 jobs. More than 8.3 million jobs have been created since August 2003 -- the longest continuous run of job growth ever.
General
2008 September Public Forum Debate Topic:
Resolved: That the United States should implement a military draft.
Pro
White House, Feb 2008