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.