Capital Markets

McCain's First Priority: Repealing the Law of Supply and Demand

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In his latest radio address, John McCain responds to Barack Obama's criticism of his mortgage plan (emphasis added):

It's critical that we stabilize mortgages, or else the housing market won't stabilize and homeowners across our country face troubles even greater than they face now. The housing market faces distortion by a glut of low-priced, foreclosed homes. And this would lead to a crash in the value of the number one asset of a majority of Americans. With so much on the line, the moment requires that government act—and as President I intend to act, quickly and decisively.

Where McCain sees "distortion" I (with a mere bachelor's degree in economics) see the interaction of supply and demand. Other things being equal, it's natural that a glut of homes would reduce home prices. The distortion occurs when the government uses taxpayers' money, as McCain proposes, to buy the mortgages on these homes at face value and turn them into fixed-rate, 30-year loans at 5 percent, reducing the size of the principal based on the decline in the value of the homes. Assuming this plan works as McCain intends, the government will be artificially propping up the price of these assets, based on his judgment that market prices are too low.

If there were no principles at stake, I'd love to take advantage of the McCain Resurgence Plan by reducing the principal and interest rate on my mortgage, or at least benefit from the higher sales price he is promising. For that matter, what about the glut of low-priced journalists who are distorting the market for my services, thereby depressing my income?