Secondary Sources: Mortgage Solutions, Climate Change, Stagflation

A roundup of economic news from around the Web.

Stemming Mortgage Crisis: In today’s Journal, Martin Fedlstein proposes a way to stop the mortgage crisis. “If the government is to reduce significantly the number of future defaults, something fundamentally different is needed. Although there is no perfect plan, a program of federal mortgage-paydown loans to individuals, secured by future income rather than by a formal mortgage, could reduce the number of mortgages with high LTV ratios and cut future defaults.Here’s one way that such a program might work: The federal government would lend each participant 20% of that individual’s current mortgage, with a 15-year payback period and an adjustable interest rate based on what the government pays on two-year Treasury debt (now just 1.6%). The loan proceeds would immediately reduce the borrower’s primary mortgage, cutting interest and principal payments by 20%. Participation in the program would be voluntary and participants could prepay the government loan at any time.”

Climate Change: On the Congressional Budget Office director’s blog, Peter Orszag aims to clarify the CBO’s recent research on carbon taxes vs. a cap-and-trade system to combat climate change. “”The Choice is Not Between Taxes and Inflexible Caps: Cap-and-Trade Programs Can Offer Varying Degrees of Flexibility. Policymakers can provide firms leeway in annual emission reductions in a variety of ways while ensuring that total emissions follow a desired long-term trajectory. Rising taxes are one method. Tax rates would need to be adjusted over time if they failed to induce the desired cumulative reduction in emissions over multiple years. Alternatively, a cap-and-trade program that included both a price floor and a price ceiling could achieve much of the efficiency advantages of a tax. The rate at which the cap declines — and that the price floor and ceiling increase — could be set to aim for a cumulative long-term emission reduction target. The policy could include provisions that would trigger a more rapid rise in the price floor and ceiling if it was failing to provide the desired cumulative emission reductions over a multiyear period. Finally, allowing firms to bank and borrow allowances can help reduce the cost of achieving a long-term emission reduction target relative to a system of inflexible annual caps. Those provisions, however, are unlikely to provide cost savings as substantial as those that might result from the alternative approaches.”

Stagflation: Writing for Slate, Daniel Gross fears a looming stagflation. “There’s a final reason why even a mild case of stagflation can prove fatal: leverage. Stagflation implies a rise in fixed costs and inputs (food, energy, the price of money itself) coupled with slowing growth in sales and revenues. This dynamic of a rising bottom line and a stagnant top line shrinks profit margins. If you have a lot of debt, and if much of that debt is floating-rate or short-term debt, a horrible combination results. If your entire business model consists of borrowing huge sums of floating-rate or short-term debt and using it to buy other assets or debt instruments that tend to decline in value when inflation rises and growth stalls, then it’s a killer. Unfortunately, that’s exactly what the financial-services sector and the American homeowner have been doing for the last several years.”

Compiled by Phil Izzo