Are YOU smarter than a Tudor monarch?

Centuries before anyone had heard of John Maynard Keynes, kings and nobles understood some of the ideas that are now associated with him. If you wanted to expand the fleet or build a new castle, the best time to do it was when times were tough. The work kept the masses quiet, and you got things done more cheaply.

So it's no surprise that current pleas for additional economic stimulus include calls for governments to borrow cheap money and invest in infrastructure improvements. Even in the UK, where the government is sticking to its austerity rhetoric, key infrastructure programmes (the Crossrail link in London; expansion of broadband to remote areas) are still going ahead.

The $447 billion new jobs plan unveiled in the US last evening by President Obama also includes a big slug of infrastructure spending, with the focus on schools and roads. However, in keeping with the spirit of the times, or at least of the Republican party, the President has also included a large tax cut, in the shape of an extension of the payroll tax cut that is otherwise due to expire at the end of this year.

Even so, it's not clear that the plan can be rammed through Congress quickly, as the President hopes. Some on the Republican side are already portraying it as just another dose of the same old stimulus that, in their perception, has already failed. Notably, they can't even bring themselves to endorse the payroll tax measure, which seems to suggest that they don't oppose higher taxes in principle; they just oppose them when they apply to the rich.

There are also likely to be problems funding the measures, since Obama has pledged to do this without raising the deficit. The recent deal on raising the debt ceiling required a joint effort to find $1.5 trillion in savings by the end of this year. That was always going to be difficult, and now the target has been raised by almost a third. This approach, referred to as "finding offsets", also raises the question of just how stimulative the President's programme can be if it involves no net new spending.

Still, we can at least be grateful that Obama did not follow the unsolicited advice offered by the one and only Anatole Kaletsky earlier this week. (Behind the Times paywall; lucky you.) One of Anatole's suggestions was that the US should rebuild its infrastructure without boosting the deficit, by resorting to...public-private partnerships, UK-style. This suggests that Anatole is the only man left in the UK who doesn't recognise that PPPs and PFIs (private finance initiatives) have been one of the greatest ripoffs ever inflicted on the UK taxpayer.*

That's not Anatole's best wheeze though. He thinks the US should put money back into the hands of consumers by ordering Fannie Mae and Freddie Mac to convert existing fixed rate mortgages, on which homebuyers pay interest of up to 7%, into floating rate mortgages at 2-3% rates. Leaving aside the risks that would pose when interest rates eventually started to rise, there's a more immediate issue that Kaletsky seems quite unaware of. Fannie and Freddie would immediately face catastrophic losses, since they have borrowed long-term funds at rates much higher than 2-3% in order to finance the fixed rate mortgages.** In the case of Fannie, for example, about 80% of its liabilities are long term (average maturity: 50 months), and almost all of that is at fixed rates. Not one of Kaletsky's better ideas, and no surprise that nothing on these lines found its way into the Obama package.

* Small example for the benefit of non-UK readers: a consortium of engineering companies formed a joint venture to refurbish part of the London underground. It was given a 30-year contract, but contrived to run out of money and go broke within two years. The engineering companies simply walked away, and the whole shebang landed back in the lap of the public sector.

** Perhaps what Kaletsky has in mind is that Fannie and Freddie should use the swaps market to turn all their fixed rate debt into floating rate. That's almost certainly a non-starter, for several reasons. The sheer size of Fannie and Freddie's fixed rate debts would put severe strain on the swaps market; counterparties would be reluctant to take on such huge amounts of Fannie and Freddie risk, given the two lenders' patchy track record -- which has just prompted the eagle-eyed geniuses at S&P to downgrade them both; and counterparties might unwilling to take on such a large slug of fixed rate commitments at a time when, as Anatole has observed, floating rate money is so much cheaper. Remember, you can't add value through a swap; you can only redistribute it. Putting all of Fannie and Freddie's fixed rate liabilities onto the balance sheets of commercial lenders and insurers would have major consequences for the cost of financing outside the housing sector.