Would you buy a house at 4.5%?

Perhaps the better question is:  "Should the government back mortgages at 4.5%?"

Before you answer, look at the yield curve.

Then read this from the Wall Street Journal:  (Hat tip to Calculated Risk)

WASHINGTON -- The Treasury Department is considering a plan to revitalize the U.S. home market that would push down interest rates for loans to purchase a home, according to people familiar with the matter.

The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages.

Government officials are under pressure to address falling home prices and mounting foreclosures, which underpin the financial crisis. The Treasury has struggled for months to come up with a plan that would ease the strains on borrowers without appearing to bail out homeowners and lenders.

"...without appearing to bail out homeowners and lenders."  One out of two ain't bad.  Continuing...

Treasury views this plan as potentially halting the slide in home prices by enabling borrowers to afford bigger loans, thus increasing demand and pushing up home values. The lower interest rates would be available only to borrowers who are buying a home, not those refinancing a mortgage.

Aww, shucks.  Well, maybe they'll offer it for refis next week.

One problem I see is that this looks like it will have a lot of moving parts.  That is, it relies on "encouraging banks to lend" and then backing the mortgages using "the clout of...Fannie Mae and Freddie Mac."

Show of hands everyone who thinks that'll work?  I thought so.  No, this has all the earmarks of being a pretty lousy idea.

But wait, remember what I said about the yield curve?  What if the government issued a special series of 30 year mortgage bonds and then (*gulp*)... well, you complete the sentence because I can't bring myself to do it (hint: it includes the word "nationalize").

Made you think, didn't it?  And that's what is so unique (and more than a little worrying) about this whole situation.  This could potentially be a moneymaker for the Treasury (at least this week--one must strike while the iron is hot), but long term it's a bad idea.  Because once you do it, it won't go away.  My message to the outgoing and the incoming administrations is to think very, very carefully before jumping on something like this.

I remember distinctly an interview I gave almost exactly a year ago (almost to the day) in which I cautioned that the wrong solution could just end up prolonging the inevitable (with regard to the subprime mess, foreclosures, etc.).  That was a year ago.  I'm saying it again here today.  Will I be saying it again a year from now?

The last paragraph is, to me at least, the most troubling thing I have written to date on the crisis.

Clearly the markets have unwound considerably in the last year, and they have a good distance to go.  I'm all for the Fed and the Treasury protecting the integrity of the payments system, but that side of things appears to be somewhat more stable now.  Perhaps its time to let things sort themselves out a bit before putting in a false bottom.