You need to act right now! (Because we are too timid.)

From the Wall Street Journal:

For an institution that jealously guards its independence, the Federal Reserve is wading into treacherous political waters.

With the economic rebound still mediocre at best, the Fed is charging into the housing debate. But in doing so, it runs the risk of politicizing itself, while also sending mixed signals to banks still trying to find their postcrisis feet.

The latest effort was a housing “white paper” sent this week to Congress, along with a series of comments from Fed officials about the importance of housing to the economic recovery. In this, the Fed may be laying the groundwork for further quantitative easing, this time purchasing mortgage securities. But its paper went beyond even the Fed’s already unconventional policies. This included ideas that might require more taxpayer funding through Fannie Mae and Freddie Mac.

But having broached the thorny issue of using government entities to boost housing, the Fed didn’t touch on questions surrounding a needed long-term revamp of housing finance. This left the Fed implicitly endorsing the housing status quo: a market that is almost completely dependent on the government and, in particular, Fannie and Freddie. Whether the government should be involved in housing, or to what degree, is of course a highly contentious political question for Congress.

The Fed’s paper suggested it may be worth pursuing more aggressive actions in terms of loan modifications, mortgage refinancing and sales of foreclosed properties even if they cause greater short-term losses at Fannie and Freddie, and so by extension to taxpayers. And the paper may have led some in markets to believe a new, government housing effort was coming. The Fed’s paper said a possible policy option would be for the government to expand existing refinancing efforts “or introduce a new program.”



6 Responses to “You need to act right now! (Because we are too timid.)”

  1. Gravatar of Seán K Seán K
    10. January 2012 at 08:16

    This isn’t related to the post, but I don’t know where best to ask.

    In “The Black Swan of Cairo”, Nassim Taleb wrote:

    “Complex systems that have artificially
    suppressed volatility tend to become
    extremely fragile, while at the same time
    exhibiting no visible risks. In fact, they
    tend to be too calm and exhibit minimal
    variability as silent risks accumulate
    beneath the surface. Although the stated
    intention of political leaders and economic
    policymakers is to stabilize the system by
    inhibiting fluctuations, the result tends
    to be the opposite.”

    Leaving aside too big to fail, did the great moderation sow the seeds of its own destruction by its stability? Is leverage and fragility the inescapable mirror of macro stability?

    So, how would we expect the financial system to operate in a world of stable market monetarist central banking? When nominal debts are guaranteed, on aggregate, what does that mean for credit, on aggregate? Would bank failures be common in a world of steady NGDP growth?

    If so, how would the palliative of NGDP growth compensate for these shocks? What would the relationship be between bank failure and RGDP?

    Would steady NGDP growth induce continual negative RGDP shocks, through the financial system?

  2. Gravatar of Benjamin Cole Benjamin Cole
    10. January 2012 at 09:02

    The Wall Street Journal wants a GOP victory, even if it means the economy stays in recession. In fact, it is probable that the WSJ and GOP partisans want the recession to continue to Election Day. What else can explain Rick Perry comments or these idiot grunts from the WSJ?

    I think Obama and the D-Party are seriously mediocre leaders. Still, I would prefer an immediate and robust recovery. In fact, I don’t care which of our mediocre parties is in power as long as we have a robust economy.

    You see, we average citizens don’t care which party is in. Only they (or their minions in the media like the WSJ) care.

  3. Gravatar of ssumner ssumner
    10. January 2012 at 10:29

    Sean K, I certainly don’t think the fairly stable rate of NGDP growth in 1982-2007 had anything to do with the housing bubble. It was caused by bad regulations, which encouraged excessive risk taking. In any case, the real problem occurred after NGDP slumped, and the financial crisis got much worse. That was in late 2008. One lesson is that the Fed shouldn’t have let NGDP fall.

    Ben, There are certainly some who want Obama to fail.

  4. Gravatar of Seán K Seán K
    10. January 2012 at 11:46

    I’m not talking about the bubble per se as much as the fragile financial system that the bubble took down. 50-1 leveraged institutions were surely a product of the great moderation. At the margin won’t individual financial institutions respond to stable 5% NGDP growth by levering up massively? How much more fragile would Citi (or individuals) have been in 2007 if they knew for a fact that nominal output would keep on growing?

  5. Gravatar of jj jj
    10. January 2012 at 12:32

    I was eating dinner when I read about this in the
    Financial Post, and an ill-timed snort nearly caused me to choke. WTF is the fed doing! These kind of statements give Ron Paul more ammo to use against them, thereby constraining the actual unconventional monetary policy that they need to be doing (if they ever wake up to that fact).

    The Post article is here:

  6. Gravatar of ssumner ssumner
    11. January 2012 at 07:04

    Sean K, I certainly agree about there being too much leverage, but that’s a failure of regulation. We can’t go around creating recessions to make banks behave more cautiously, that would be insane. Set higher capital ratios, or get rid of FDIC and TBTF.

    The bubble didn’t take down the financial system, falling NGDP did. If NGDP keeps growing at 5% then the financial crisis would have been far milder.

    jj, I agree.

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