The modest impact of cheap money

The incredibly interest rates available these days seem to be benefiting some homeowners. The number of mortgages recorded at the Middlesex North Registry of Deeds during October 2010 was 37% percent higher than the number recorded in October 2009 (1508 vs. 1101). This refinancing surge disproportionately is benefiting homeowners in the suburbs rather than the city of Lowell itself. Lowell mortgage recordings were only up 9% while the nine towns in the district had a 45% increase in mortgages recorded.

The benefits of refinancing at this time are substantial. Someone with an existing mortgage of $200,000 at 7% has a monthly payment of $1331. If that homeowner were to replace that mortgage with one for $200,000 at 4% – an interest rate readily available now – the monthly payment would drop to $962 and the homeowner would have an additional $369 per month in his pocket to spend on other items.

You would think that if enough people were to refinance like this, the extra money that would be pumped into the economy would provide all the stimulus the economy would need. Author and economist Robert Kuttner disagrees with that conclusion in an Op-Ed in today’s Globe. He argues that these types of infusions of cash would have only a modest benefit “But none of this is potent enough to get the economy out of its vicious circle of depressed consumption, high unemployment, damaged banks, reduced business investment, and slow growth.” Kuttner observes that it took World War Two with its massive government spending programs to pull the United States out of the Great Depression. It’s clear that Kuttner is of the belief that the only way to bust out of our current economic malaise is with a robust government stimulus program of like scale. But given the current political realities, Kuttner sees little chance of any such measures being contemplated, never mind enacted and so we are forced to rely on “cheap money” to help inch our way out of our economic doldrums.