Joel M. Hoffman, PhD

It’s easy to fix half a problem if you don’t mind making the other half worse.

And I think this is what we see with President Obama’s plan to help home owners refinance at a lower interest rate.

At first glance, it seems like a good idea, because home owners will save money thanks to lower mortgage payments. But that’s only half the story.

The other half is that people who have invested in real estate will earn less.

For example, on each $100,000 of mortgage loans, an interest-rate drop from 6% to 4% saves a home owner almost $1,500 per year. If, let’s say, one million people shave two percentage points off an average of $250,000 in mortgages, then one million people will save on average upwards of $36,000 each over the next ten years.

But by exactly the same token, investors in real estate — banks, but also pension funds and the like — will collectively lose more than $36 billion over the text ten years.

Just by way of example, one adverse reaction will be to the New York State Teachers’ Retirement System, which has some $1.34 billion invested in real estate. If the return on that $1.34 billion drops from from 6% to 4%, the fund will earn $27 million a year less, for a total loss of $270 million over ten years.

In short, there’s no free lunch here. When some people save money, other people earn less from their investments.

Like a ship taking on water, America is sinking from debt. And like two groups of sailors — each trying to save half the boat by shifting the water to the other side — our leaders seem focused on solving half the problem even if they make the other half worse.