Just What We “Need”

by Mario Rizzo

Investors’ eagerness to invest in mortgage debt helped drive mortgage rates to all-time lows this week, Freddie Mac said.

The average rate on 30-year fixed-rate mortgages was 4.78%, the agency said Wednesday, matching a record low set in April. That was down from 4.83% from the previous week and 5.97% a year ago

I am amazed that aggregate-demand economists can look at the housing market and simply wonder how to bring it back to normalcy. Today the Wall Street Journal reports that investors are flocking to invest in mortgage-backed securities now that the Fed has been buying them. Freddie and Fannie are too big to fail, and so forth. The risk premium relative to Treasuries has fallen to the narrowest point this year.

From the investor’s perspective these are relatively safe problem-free investments. On the other hand, from the social perspective these investments delay the necessary adjustment of resources out of housing — remember: the over-expanded bubble sector?

Our aggregate-demanders (aka “Keynesians”) do not need to worry because during recessions the allocation of resources is not important. All that matters is propping up spending and restoring “confidence” in something called “the economy.”

UPDATE: A New York Times editorial argues that the housing stimulus is not working. What is their standard of “working”? It is hard to tell precisely. The complaints are that new housing construction has fallen, prices of houses are expected to fall still further and that more homeowners have negative equity. So presumably a policy that “worked” would have increased housing construction, propped up prices, and prevented the spread of negative equity. No readjustment in their play book! What is more disturbing, but predictable, is that the drumbeat for reconsidering the Fed’s plan to begin exiting the housing market has begun:

And the Federal Reserve, whose interventions have sustained the housing market over the past year, must show flexibility. The Fed has made it clear that it would prefer to begin withdrawing support for the market in the months ahead. But without other strong and successful fiscal measures in place, that could do more harm than good.

Stay tuned.

Falling Wage Rates

by Jerry O’Driscoll  

In today’s Wall Street Journal, there is an article titled “Returning Workers Face Steep Pay Cuts.”  The article cites research by Kenneth Couch of the University of Connecticut that returning workers are taking on average a 40% pay cut from their old jobs.  This is first and foremost a personal tragedy for those affected.  The question we must ask as economists is why?  

Four Reasons Why The EXIT Will Fail

by Andreas Hoffmann and Gunther Schnabl*

With central bank balance sheets and government debt levels exploding, discomfort about future inflation arises. A discussion about the appropriate exit strategy from low-interest rate policies has started. The standpoints of central banks are different. The ECB seems more decisively in favour of an early exit. The Federal Reserve discusses the technical aspects rather than an early timing (see Mario’s earlier blog entry). The Bank of Japan is said not to exit earlier than in five years. What situation are we facing? A return to monetary policies that are neutral to inflation and bubbles is unlikely for four reasons:

Mankiw And Meltzer Are Right! More Or Less

by Mario Rizzo  

As we have been saying here, the claims that the fiscal stimulus has saved or created X number of jobs is not a simple empirical question. It must be an inference from a model that tells us what would have happened in the absence of that stimulus. Collecting reports from various firms or local governments about their job situations will not do. At best these individual reports are based on pop-theories on the part of the reporters about what would have happened.

Behold: The Recovery Is At Hand

by Mario Rizzo  

The Gross Domestic Product (GDP) is growing again at an annual 3.5% rate for the third quarter of 2009. Some people say this means that the recession is over. Apart from the much-touted stubborn unemployment problem, does this make sense? 

The (Counter)Productiveness Of Stimulus?

by Mario Rizzo

Continuing the Stimulus Watch (HT Greg Mankiw)

Greg Mankiw continues to trace the unemployment rate as predicted by the original calculations of the effect of  the fiscal stimulus as against no-stimulus. My advanced “eye-ball” extrapolations suggest that we are following the same path as the no-stimulus projection BUT at a higher level of unemployment throughout.

Dare I suggest (ever so tentatively and with all scientific humility given the nature of the data) that the stimulus has done harm?

Paul Krugman’s Certainty

By Mario Rizzo    

Paul Krugman’s latest opinion piece in The New York Times is one big non-sequitur.

Robert Barro on the Impotence of Stimulus

by Mario Rizzo

In an interesting opinion piece for the Wall Street Journal, Robert Barro and Charles Redlick give empirical evidence supporting the claim that stimulus spending doesn’t work. By “doesn’t work” they mean that the government spending multiplier is less than 1. This means that stimulus spending increases national income by less than the amount of new spending. Why? Barro and Redlick are vague on the reasons.

Reflating the Bubble, Part II

by Mario Rizzo

In a recent post I criticized the extension of the Fed’s policy of buying mortgage-backed securities. Then I was told by a quite-knowledgeable economist that I may have misread the report in the Wall Street Journal. The first sentence states:

The Federal Reserve, in a move aimed at keeping interest rates low for home buyers through early next year, decided to extend and gradually phase out its purchase of mortgage-backed securities. (Emphasis added)

So while it is true that the Fed is extending the program, it also plans to phase it out. I replied (in private email) that I preferred to pay attention to what the Fed is actually doing rather than to what it is promising to do.

Reflating the Bubble?

by Mario Rizzo  

The Fed has decided to extend, at least through early next year, its program of purchasing mortgage-backed securities. The Wall Street Journal reports:  

“The Fed’s action signals its belief that the economy, while in recovery, remains fragile and that housing, which has seen some improvement in recent months, has only started to pull out of its slump.”  

What is the objective of their action? When will they know they have succeeded?