Don’t Forget the Fed!

May 29th, 2013 at 8:24 am

There’s a spate of articles out today on the improving housing market, with reference to its positive impact on the overall economy.

The latest sign [of the housing recovery] emerged Tuesday as the Standard & Poor’s Case-Shiller home price index posted the biggest gains in seven years. Housing prices rose in every one of the 20 cities tracked, continuing a trend that began three months ago. Similar strength has appeared in new and existing home sales and in building permits, as rising home prices are encouraging construction firms to accelerate building and hiring.

The broad-based housing improvements appear to be buoying consumer confidence and spending, countering fears earlier this year that many consumers would pull back in response to government austerity measures.

We’ll see re austerity—the cuts and furloughs are slowly unfolding—but there’s no question that the housing market, once a huge anvil around the economy’s neck, is now raising homeowners’ wealth and facilitating stimulative refis into very low mortgage rates.

It’s the last part—about the low borrowing rates and especially about the Federal Reserve’s role in pushing them down—that I thought the articles overlooked a bit (excepting the WSJ one, which mentioned this point early on).

Sure, the housing market would have eventually recovered but absent the Fed’s aggressive rate cutting, though their actions on the Federal Funds rate and their quantitative easing program, it would have taken a lot longer (note figure below, including ratcheting down in the circled parts).  The Fed’s QE program in particular, by scooping up billions in mortgage backed securities when the private MBS market had all but shut down, is particularly implicated in low mortgage rates and housing market’s return to life.

I fear that many people’s view of economic policy is that “nothing works” be it monetary or fiscal policy.  Sometimes it doesn’t and sometimes its consequences are unintended.  But broadly speaking, such cynicism is dangerously wrong, and to counteract it we need to vigilantly recognize the linkages between policies and their outcomes.



Update: Wonkbook gets it (and thinks we should give Bernanke some fruit…):

Scott Sumner, an economist at Bentley University, has a different take. Congress might’ve hurt the economy this year but Federal Reserve Chairman Ben Bernanke has been working overtime to help it. “The Fed does monetary stimulus in late 2012, citing the need to offset the drag from fiscal austerity,” he writes. “Then 2013 turns out to be a pretty decent year, no worse than 2012.” Perhaps there’s no mystery here at all. We just owe Bernanke a fruit basket.

Update #2: The WaPo’s Neil Irwin agrees that the Fed is playing an instrumental role in reviving the housing market, and goes on to make some trenchant observations about the distributional implications of monetary vs. fiscal policy.

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6 comments in reply to "Don’t Forget the Fed!"

  1. rjs says:

    what happens when interest rates go up?

    for a hint, we might divide new home prices over time by real disposable income per capita…

  2. smith says:

    This is a cruel joke for millions still caught in a foreclosure crisis.

    Here’s a recent graph:

    As the housing market recovers, banks may decide to accelerate foreclosure actions, since the prospect of a sale is enhanced vs. previously taking procession of a valueless asset.

    Here’s a longer look to verify the pre-2007 level in the above graph was normal (under 1%)

    Banks meanwhile circumvent what little relief the Obama administration has managed to provide.

    This is still an untold story, it wasn’t just inadequate stimulus giving us a lost decade. Obama could have aided housing, kept millions in their homes, prevented needless waste of housing stock, and speeded recovery through administrative action alone, no congressional approval needed. He didn’t and he’s still not, just look at the graphs.

  3. Dave says:

    I think buying MBS was a good Fed policy. It did help.

    But I also believe that now is the right time for the Fed to exit that market.

    Probably nobody will agree with me on this next point, but I’ll say it anyway. I think the MBS market should be torn down at this point. Freddie and Fannie should be phased out.

    The commoditization of mortgages led to the ignoring of mortgage risk, which should not be socialized across the international economy the way it is now. No time to explain in detail right now, it is a long story.

    • smith says:

      I think those are two separate issues (securitization and federal involvement in mortgages)

      I think chopping up mortgages into securities should be made illegal.

      From what I’ve read,
      before 1970, Fannie only bought FHA, VA, and FMHA mortgages, and there was no other secondary market. Return to those original constraints. Eliminate excessive profit and leverage from MBS, and outrageous executive compensation of quasi government entities.

      I think a careful program needs to be designed to phase in these changes without upsetting the housing market.

      I think passing these changes in congress will require a long public campaign that eventually forces out members of congress that will fiercely oppose these changes and other progressive proposals.

      Wrestle congress back from the banks. “They frankly own the place.” Sen Durbin Apr 2009

  4. Neildsmith says:

    “I fear that many people’s view of economic policy is that “nothing works” be it monetary or fiscal policy.”

    I think this exposes the limits of both types of policy… they can prevent macroeconomic catastrophe, but not much beyond that. Both policies fed cash to the wealthy and did little for those who really suffered. Helping those truly in need demanded a whole different set of policies (debt forgiveness, cash payments to the poor, free college education, free drug rehab, gang eradication, etc.) that are simply unacceptable to millions of Americans.

    What the economy really needed after a major bubble / financial shock was simply time to heal and forget.

  5. Cheater says:

    Yeah.. thanks for making rents and house prices more expensive for me. I thought we had a free-market, and I refused to buy in the years as prices got more and more out of control. Now existing owners have been bailed out and all the stimulus to support values for older owners and to make non owners pay more. Way to go!!!!!!!!!!!!!!!!!!!!!!!!! You think it’s fair and dandy.