Could the government create a backdoor stimulus?

From Ronald D. Orol of Marketwatch on Aug. 4:

WASHINGTON (MarketWatch) -- An idea that could create a massive refinance wave -- and a back-door stimulus program to boost consumer spending -- is generating debate among investment bank analysts in New York and in Washington policy circles.

Morgan Stanley & Co. released a report, entitled "Slam Dunk Stimulus," last week arguing that the Treasury Department could engineer a broad, streamlined refinance program for all government-guaranteed mortgage-backed securities.

Analysts at the investment bank contend that millions of mortgages backed by the U.S. government could be refinanced without the need for an analysis of a borrower's credit quality because the principal is already backed by the government. Many homeowners who are unemployed, have poor credit or who owe significantly more than their homes are worth currently can't refinance, but would be permitted to use such a program.

Such a sweeping refinance program could boost the economy by injecting cash for spending into the hands of millions of consumers in the form of lower home-loan payments, they argue. It could also help some borrowers avoid foreclosure and help stabilize neighborhoods.

However, critics of the idea argue that the Obama administration would never employ such a backdoor stimulus because the costs to the system are significant and outweigh the benefits.

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