There is much debate over whether the Federal Reserve should tighten or further ease monetary policy. This dichotomous framing overlooks another possibility, which is whether the Fed should change the mix of its stance, tightening in some areas and further easing in others.
There is a widespread perception that quantitative easing is synonymous with increasing the money supply. But it is more than that.
It is time to tackle the systemic flaw in housing policy – reliance on leverage – and introduce minimum downpayment regulations for all homebuyers, writes Charles W. Calomiris
Without high leverage the subprime boom and bust could not have happened. Risky no-docs borrowers would have been unwilling to deceive lenders if they had to pledge a large amount of their own savings as a downpayment (deposit). House price declines would not have produced huge loan losses if homeowners had retained a minimum 20 per cent stake in their homes.
During the 1990s and 2000s leverage tolerances on US government-guaranteed mortgages rose steadily and dramatically at FHA, Fannie Mae and Freddie Mac. The average loan-to-value (LTV) ratio of FHA mortgages rose to 96 per cent, and a third of Fannie and Freddie’s purchases leading up to their insolvencies had LTVs of greater than 95 per cent.
Not only are high LTVs destabilising, they undermine the objectives of housing policy. Its central goal is promoting stronger communities by encouraging residents to have a stake in them. But a 97 per cent LTV creates a trivial stake; homeowners become renters in disguise, able to abandon homes at little cost.
Update: Read Prof Farmer’s response to readers’ comments
By Roger E. A Farmer
I argue in this piece that:
- Quantitative easing should be expanded
- Even if the Bank of England were to buy the entire UK national debt that this policy would not be inflationary
- The global recovery is faltering and an expansionary policy is needed to encourage private investors to create jobs
- Additional quantitative easing could save as much as £38.5bn a year in interest costs to the taxpayer
May 18, 2006 was an important day. It was the day when the Bank of England began to pay interest on reserves. In October 2008 the Fed followed suit. This monumental change in policy gave the Bank an important new tool in its arsenal. It allowed the Bank to influence the economy not just through expansion or contraction of the stock of money, but also through the composition of its balance sheet.
By Richard Robb
What should investors in developed countries worry about — inflation or deflation? Evidence from the past two decades suggests the answer is “neither.” Progress in monetary policy may have rid the world of price instability once and for all; like smallpox, Germany military aggression or the spread of orthodox Marxism, inflation could well turn out to be last century’s problem.
As recently as the 1990s, France, UK and Italy pegged exchange rates. The US and UK targeted money supply in the late 1970s and early 1980s, while the Bundesbank targeted Germany’s money supply right up until monetary union.