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James Hamilton thinks that in order to return to a healthy economy we need to do something about this: Household mortgage debt skyrocketed in the 2000s, and income did not keep up. The solution depends on some mix of foreclosures, increased saving, and GDP growth. But these elements don't make good teammates with the economy in its current state. So Hamilton, writing at EconBrowser , offers some support for the Federal Housing Finance Agency proposal to alter the Home Affordable Refinance Program : One obstacle to refinancing has been mortgages that are underwater, which means that, as a result of declines in house prices since the time of the purchase, the principal owed on the mortgage exceeds the current resale value of the home. Previous rules would not allow Fannie or Freddie to guarantee a loan whose value exceeds that of the home, which refinancing an underwater loan would require. The new FHFA proposal relaxes that requirement so as to allow refinancing for underwater loans that were originated more than 2-1/2 years ago and on which the borrower is current on the payments with no late payments over the last 6 months. One question of interest is, who will ultimately end up losing the income that corresponds to the household's gain from refinancing? Since the original loans are currently guaranteed by Fannie or Freddie, and since Fannie and Freddie's liabilities in turn are now de facto guaranteed by the U.S. Treasury, one's first thought might be that the household's gain is ultimately the loss of the U.S. Treasury. However, Fannie and Freddie guarantee against default but not against the loss that comes from pre-payment, so it's the holder of the loan, not the U.S. Treasury, that loses. On the other hand, Fannie and Freddie own over a trillion dollars of the loans themselves, and the Federal Reserve owns another trillion. The Federal Reserve contributed $82 billion to the U.S. Treasury this year from its earnings on the mortgage-backed securities and other assets that it holds. A lower income flow from these would reduce the size of the payments to the Treasury that the Fed is able to make and increase the net contribution the Treasury needs to make to keep Fannie and Freddie solvent. Read Hamilton's full analysis here .

The rise in GDP during the third quarter prompted the Room for Debate blog of the New York Times to ask whether the Obama Administration's $787 billion stimulus plan worked. MIT and Baseline Scenario 's Simon Johnson says the stimulus package worked on both an economic front and a political front (which then led to larger stimulus effects globally). Harvard University Economist Jeffrey Miron says no, look to monetary policy. Russell Roberts , economist at George Mason University, is sekptical of the stimulus plans power and suggests the growth might have occurred without it. And Mark Thoma says that "the stimulus programs in place now are probably too small." Read the full "debate" here . Meanwhile, James Hamilton had one of the most instructive pieces on the GDP numbers at the Econbrowser blog. Hamilton feels very positive about the GDP growth, and he neatly breaks down, and illustrates, the various contributors to the growth: Consumption spending is the biggest component of GDP and the main contributor to third quarter growth, accounting by itself for 2.4 percentage points out of the 3.5% total, and with consumer purchases of motor vehicles and parts alone 3/5 of the contribution of consumption. Next in importance was inventory rebuilding, which added 0.9 percentage points to the total and could make a significant further contribution in the quarters ahead. Housing is finally making a positive rather than a negative contribution, and nonresidential fixed investment was a smaller drag than I had been expecting. Imports grew faster than exports, though I'm relieved that trade overall is coming back. The government sector made a smaller contribution than one might have thought given the fiscal stimulus, in part because lower state and local spending offset some of the increased federal spending. For a healthier long-run growth path I'd prefer to see business fixed investment and net exports adding rather than subtracting. But, compared with what we've been seeing recently, this overall is a quite welcome report. Hamilton and Menzie Chin n track recessions through their Econbrowser Recession Indicator Index --a pattern recognition algorithm for identifying recessions that waits one quarter for data revisions and clear trend identification before making an assessment. With the third quarter GDP numbers out they looked at the revised second quarter figures. And they conclude that the recession did not end during the second quarter. Read the full GDP analysis here .