Simone Baribeau

As the Fed approaches the end of its purchases of mortgage backed securities, Fannie and Freddie, the mortgage giants now under government conservatorship, are again raising the eyebrows of some within the Fed and congress.

The latest comments, fast on the heels of those of Ben Bernanke last week, come from Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, and Republican representatives Darrell Issa and Jim Jordan.

From Mr Lacker:

I have said elsewhere that it would be a mistake to try to build this expansion on another housing boom and that over time we should wean our economy off dependence on housing subsidies. Too many houses were built over the last decade, and what we’ve been through the last three years should teach us that subsidising housing mortgage debt was a dangerous policy that was carried too far. But whatever society decides about the bias toward housing, real regulatory reform would be incomplete without addressing the fate of the government-sponsored housing finance enterprises.

Separately today, responding to Tim Geithner’s testimony before the House Budget Committee that the post-conservatorship plan for the troubled mortgage giants wouldn’t be released until next year, Mr Issa and Mr Jordan called for a hearing into the administration’s treatment of the GSEs. Read more

Simone Baribeau

Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, today argued that the primary reason for financial market instability was a poorly defined government safety net for financial institutions. The bursting housing bubble, he said, caused pain for financial groups, but there was nothing fundamentally destabilising about it: institutions overvalued certain assets, and as the market corrected itself, people lost money.

The considerable downturn in housing market fundamentals alone would have led one to expect substantial movements in financial prices and quantities, with attendant strains for many institutions, even in a very well-functioning financial system.

Interconnectedness isn’t inherently destabilising, he argues. Financial institutions have every reason to “neglect the implied exposure to their counterparties’ counterparties.”

But, he says, the moral hazard created by the government’s implied guarantees to large interconnected institutions is destabilising. Read more