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.

But now the Wall Street Journal reports that the Obama Administration plans a new $35 billion program to buy the bonds of state and local agencies that assist low-moderate income people to finance the purchase of homes at low interest rates. The plan may last three years.

The Wall Street Journal further explains:

While policymakers are beginning to unwind some of the other emergency programs extended to financial markets during the financial crisis, housing remains a weak spot that some view as too fragile to survive without significant government backing.

President Barack Obama said in February his administration would find a way to help support state housing finance agencies. Such a move has been pressed by state and local politicians and by housing advocates. House Financial Services Chairman Barney Frank, a vocal supporter of such housing initiatives, was the author of legislation earlier this year that closely mirrors the administration’s plan.

I guess the “trick” here is that the Fed may unwind at the same time another arm of the government extends more of the same policy.

I have nothing to add to my previous post on the economic foolishness of this. I simply want to point out that “unwinding” will not happen so easily as a Fed promise.

(The alert reader will note that Barney Frank is completely incorrigible.)

UPDATE: See Jeff Miron’s post on this issue.

2 thoughts on “Reflating the Bubble, Part II

  1. Housing finance is now largely dependent on government backing (including the Fed’s support here, which is fiscal policy not monetary policy). How does the government “unwind” its support w/o damage to the industry it has been supporting? How can the Fed unwind its easy monetary policy w/o painful adjustments throughout the economy? These are the very adjustments it and the Bush/Obama adminsitrations sought to prevent or delay.

  2. This is a rather hilarious section, actually, “housing remains a weak spot that some view as too fragile to survive.”

    Yes, because of course without USG support no one would want to live in a house.

    I understand they mean something more the end that prices would drop, or sales would drop, or something equally arbitrary (they know the right prices and the right number of sales?) Reality is much simpler than they would make it out to be. If people want to live in houses–and I think history is on the side of that particular supposition–then they will buy houses. No disruption that could possibly be imagined would overthrow all of human history and prevent people from living in houses. To live in them they have to build and purchase them, so I think the market will be able to survive.

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