How much would mass refinancing do for the economy?

Lately, the Obama administration has been talking up a proposal to get Fannie Mae and Freddie Mac to knock down the barriers keeping underwater homeowners from refinancing their mortgages. Columbia University’s Glenn Hubbard, who led the Council of Economic Advisers under President George W. Bush, is calling for a more ambitious version of the program.

A mass refinancing effort would basically encourage creditworthy homeowners to take advantage of low interest rates by getting a new and cheaper mortgage on their house. The hope is this will keep underwater homeowners away from foreclosure and help other homeowners save some money. But what is it likely to do for the economy? There have been estimates suggesting it would be equivalent to an $80 billion tax cut. But Macroeconomic Advisers is out with a detailed assessment of the policy, and their predictions aren’t very impressive: “At most, such a plan might boost GDP growth by 0.1 to 0.2 percentage points,” they write.

The issue, they say, is that refinancing doesn’t act as a tax cut. It acts as redistribution. Money that was getting paid out as interest to lenders is now being kept by borrowers. As such, “the net stimulus generated by the refinancing would reflect the difference between how much borrowers raise spending as their rental income rises and how much lenders reduce their spending as their interest income falls.” There’s reason to think that borrowers, in general, are more likely to spend than lenders are, and so there is some net stimulus here. But, at least according to Macroeconomic Advisers, not all that much.

Which isn’t to say the plan isn’t worth doing. If MA’s conclusions are right, it would bppst the economy a bit, stabilize the housing market a bit, and help some homeowners avoid foreclosure. It would also shift income from lenders, who have gotten a pretty sweet deal in recent years through bailouts and financial-market stabilization policies, to homeowners, who haven’t gotten quite so much help. That’s not nothing. But it’s not a miracle cure for our economy, either.