03/08/2009 05:12 am ET Updated May 25, 2011

Senators Go Wild!, Approve House Flipping Subsidy, Media Doesn't Notice

The reporters covering the stimulus have been so busy editorializing against it that they haven't had time to pay attention to what Congress is doing. Last night Congress approved the Isakson amendment which gives $15,000 (or 10 percent of the purchase price, whichever is lower) to every person who buys a home in 2009.

Somehow, Isakson puts the cost of his tax break at just $19 billion. Let's break the Washington rules and try a little arithmetic. Even with weakness in the housing market, it is still virtually certain that we will sell close to 5 million homes in 2009. The overwhelming majority would qualify for the full credit. So, we get 5 million times $15,000. That sounds a lot like $75 billion.

And this is before we get to any gaming. It's hard to see why tens of millions of people wouldn't figure out a way to buy a house from a friend or relative and get their $15k. If we can get one-third of the country's homes to change hands (lots of jobs for realtors) that would be good for $375 billion.

It also is worth raising a question or two about the wisdom of having Fannie and Freddie buying up mortgages at 4.0 -4.25 percent, as required by Isakson's amendment. Suppose that the economy recovers in a few years (not likely if this crew is controlling economic policy) and mortgage interest rates rise back to more normal levels.

The 30-year mortgages that Fannie and Freddie issue today at 4.0 percent interest will be worth about 20 percent less in 3 years if the interest rate has risen to 7.0 percent. If we get $2 trillion in mortgages at the 4.0 percent rate, then this gives Fannie and Freddie losses of $400 billion. This may be a cost worth enduring to boost the economy, but it would be worth at least noting in assessing the proposal. After all, a few hundred billion here and a few hundred billion there can add up to real money.

It would have been helpful if the reporters covering the debate could take a little time explaining these issues to readers.

[Addendum: I probably should have made clearer one of the obvious flaws in this proposal if the intention is to help the housing market. The overwhelming majority of beneficiaries of the credit will be people who already own a home. In these cases it is not increasing demand in the housing market, just encouraging people to move. So, I sell my home and buy someone else's home. That doesn't increase demand in the market, it just leads to a shuffling of homes. This could be avoided by restricting the credit to first time homebuyers, as is the case with the current credit.]