You know it has to be election season, because politicians of all stripes are making dimwitted proposals on how the Federal government can fix the U.S. economy. I’ll ignore some of the crazier proposals, such as Newt Gingrich’s “moon colony” scheme. Instead, let’s focus on Obama’s new home loan refinancing plan. Obama’s plan would allow homeowners to refinance loans through the FHA and has an estimated cost to the Federal government of $5 – $10 billion. Doesn’t sound so horrendous thus far, but the devil is always in the details.
Here’s where it gets problematic: in order to pay for the program, Obama proposes a new tax on the banks. At first blush, this is something that most American voters probably won’t give much thought to. After all, it’s the banks paying the tax, not them. But that’s where they would be incorrect. If the banks are paying the tax, then the tax gets passed on to consumers in the form of higher credit costs.
With higher credit costs, the demand for housing will fall, as fewer people will want to take out loans in order to buy homes. And a lower demand for housing, of course, results in more downward pressure on housing prices. This, in turn, harms the banks (not to mention homeowners who are actually making their payments!) and leads to less credit available in the economy. Less credit available means fewer loans to small businesses, which tend to be net “job creators”.