Meanwhile, Treasury Secretary Henry Paulson has put together a modest refinancing safety net that grants poorer homeowners some breathing room in which to modify and work out jumps in low teaser rates. The Paulson plan would shift borrowers into FHA-insured refinancings, which can be packaged by Ginnie Mae (the Government National Mortgage Association) into new loan pools that will be bought and sold by investors. It's a relatively small plan that could help a half-million borrowers, and it will pre-empt Democratic efforts to spend billions on direct subsidies or bailouts.
The Fed can aid this plan on Tuesday by getting its target fed funds rate down by 50 basis points. This will take the pressure off adjustable-rate-mortgage increases. What's more, the central bank can help unclog frozen short-term financing problems in the commercial paper market in New York and the interbank LIBOR markets in London. If businesses can't get short-term loans, the economic expansion will be seriously threatened.
The Fed also must undo the inverted Treasury yield curve whereby the 4.5 percent fed funds rate remains well above the 4 percent 10-year Treasury rate. This situation has prevailed for 18 months; unless it's fixed immediately, it represents an illiquidity threat that increases the odds of recession. A 3-month Treasury bill around 3 percent is pointing the way for the fed funds rate.
Righting the yield curve and expanding the monetary base by at least twice its current 2 percent growth rate would also provide new oxygen for the low tax rates on investment put in place over four years ago. The incentive effect of these supply-side tax cuts has been smothered by an overly tight Fed. But if Bernanke & Co. moves aggressively, business investment and capital formation will soon pick up speed.
This sort of fiscal and monetary coordination will continue the Bush boom for years to come. Though mainstream media outlets will never admit it, President Bush has kept America safe and prosperous. But history will eventually judge him in a more kindly light.