Call it quantitative easing with a vengeance. The Fed's new programs--$200 billion in credit to support private purchases of securitized auto, credit-card and student loans; and $600 billion to buy mortgage-backed securities issued or guaranteed by Fannie and Freddie--constitute another dramatic widening of the Fed's remit. The new facilities are not brand new concepts, however: they add to existing schemes to support the commercial paper market (involving commitments that approach $2 trillion in their own right). The new facilities will further engorge the Fed's balance sheet: rather than adding to public borrowing, like the TARP, this is money creation by another name, targeted on specific sections of the credit system.
As time goes on, the paralysis over the passage of the original TARP--with Congress attempting to impose a precise design of its own on the Treasury and Fed--seems increasingly absurd. So much for accountability. Yet what the Fed is doing seems right to me. Try everything; do more of what seems to be working, and less of the rest. What was daft at the outset was the idea that a single detailed blueprint could be drawn up ex ante, given a political stamp of approval, and then executed to the letter. I am relieved--and surprised--that the system is allowing this much learning by doing, and that the experiments are being conducted on so vast a scale. In this respect, maybe the presidential transition and the semi-attentive Congress that goes with it are a blessing in disguise.
Will it work? Who knows? The new scheme instantly suppressed long-term mortgage rates by about half a percentage point, which is not nothing. But with house prices still falling, will that be enough to persuade home-buyers to return to the market? It helps, but only a little--and housing is still at the centre of all this. We need action on foreclosures, which still threaten to make house prices undershoot, with even further collateral damage in credit markets. And I hope somebody in this Treasury or the next is taking a hard look at Allan Meltzer's proposal for temporary tax-relief for house buyers.
Treasury Secretary Hank Paulson's plan helps banks and lenders. It does not address the problem - an excess supply of housing. Eliminating excess supply will end the housing problem and help the mortgage market because mortgage value depends on house value. Buying or adjusting mortgages will not do much for house prices. And any programme to rewrite mortgages in default encourages more defaults.
To address the housing problem, Congress and the administration should take actions that increase the current demand for housing. For a limited time, say up to the end of 2009, allow buyers to use the value of their down-payment (or some part of it) as a tax deduction. Or, reduce the tax rate for qualified buyers who purchase a house between now and January 2010. Or do both. Give the benefit to all home buyers, including those buying a second or third house.
Some may be speculators. Not a problem. The goal should be to remove the excess supply of houses and condos, not to reward or punish particular groups. Increased housing demand will work to stabilise prices, not immediately but sooner than would otherwise occur. Reducing the excess housing stock reduces defaults by slowing price decline. And it brings nearer the time when homebuilding increases.
Some proposals urge the government to buy mortgages. This does little to remove the excess supply of houses, although it may reduce the number of defaults. But reducing defaults does not stimulate the demand for housing. It helps some who are hurt and may keep the problem from growing, but it does not relieve the problem of existing excess supply.
This was from Bloomberg:
"The U.S. officials, speaking on condition of anonymity, said they don’t see the Fed purchases of mortgage bonds as a way of “quantitative easing,” or using central bank policy to add reserves to the banking system when interest rates are very low, even though the purchases will have that effect. "
Why do you suppose they don't trumpet it as a positive side effect?
"I am relieved--and surprised--that the system is allowing this much learning by doing, and that the experiments are being conducted on so vast a scale"
I agree that it's far better than rigidity of the sort the Bush admin has previously shown. But there's also a sense of desperate shooting in the dark with all these measures, and that doesn't exactly inspire confidence. I guess that can't be helped at this point.
It's also clear that the original TARP proposed by Paulson would have been a mistake.
Clive, I enjoy your columns very much, but I'm a little concerned with all the attention paid to "stabilizing" housing prices.
I'm a renter, and like a lot of renters in big cities (SF Bay Area in my case) it got very tiresome watching an obvious bubble inflate, and even more tiresome listening to those who bought in the past 6 or so years pat themselves on the back for their investing acumen. Of course this is all taken from my self-serving perspective.
Admittedly, sections of the country have had a steep fall in house prices. The Bay Area, along with many other regions, has not dropped all that much to date-- yet we're now supposed to prop up these inflated prices, with tax money to boot? Keep people in their homes who had no business buying them at the 2004 or 2005 price, just as things get interesting for those who had been frozen out?
Naturally there's a larger interest in preventing a correction from becoming a rout, but look at this from the 1st time buyer's perspective, who's been shut out of the market and watching a rocket ascend for six, seven years now. Or the good folks in Milwaukee, Salt Lake City or any of the hundred other cities that didn't have a housing bubble of any note and not surprisingly wonder what business it is of theirs to aid an overzealous borrower in San Diego.
Is it not agreed that it would take a saint to agree to stabilize prices today, when nothing was done to keep them affordable earlier? This explains a lot of the outcry and schadenfreude whenever talk of a housing bailout comes up.
More tax breaks for real estate what a dumb idea. Why would we want to go even more down the real estate game. The problem is that real estate activity is already too much of our GDP. Why not put the money to work actually making things?
Allan Meltzer - can the people getting the tax credit afford the homes?
We've had plenty of government subsidized demand for housing, especially demand that the buyers cannot really afford. Should there be tax credits for Cadillac Escalades if there is an "oversupply" of them.
No doubt, the supply of housing needs to be reabsorbed, but so many schemes, including loan modification, don't get to the simple fact that people are buying more house than then need or can afford.
It is not really a financial decision: if economist believe that buying a house is a stream of consumption, then do people really need 5 bedroom houses with pools and expensive yards out in the Inland Empire of California: who really needs that? It is perhaps a conditioned belief (delusion really) that it is appealing to "consume" such a property. Should the government be incentivizing people to buy up such properties? If there is not some inherent demand to buy these other than ridiculously cheap mortgages or government subsidies, then let the weeds and vines pull down those houses. No, I am not advocating tearing or burning down "excess" properties, but they should stand on their own, no pun intended.
Why doesn't the Sierra Club or Nature COnservancy buy some of these tracts in Florida or California and hold them as green-belts or add-ons to parks. I would much prefer that to the government trying to shoe-horn buyers into ill-conceived housing.
Since experts, pundits and ne'er-do-wells have all agreed not to agree on whether or not any aspects of any of the sundry bazillion-dollar bailouts will work, I'm going with Tom Paxton's plan, which sounds foolproof. (See the center column of www.RealityChex.com for Dr. Paxton's prescription.)