In a white paper submitted January 4th to the Senate Banking, Housing, and Urban Affairs committee and to the House Financial Services Committee, Fed Chairman, Ben Bernanke put forth nearly every conceivable option for the government to completely take over the United States housing market. At a time when some government program or entity already has its hands tightly around the neck of every aspect of housing, it may surprise readers that there is still room for government involvement. Apparently there is, and Bernanke and friends are moving in.
Frustrated with the results of the Fed’s $2.1 trillion balance sheet expansion, zero percent interest rate policy, and skyrocketing M2, Bernanke is calling on congress and the housing agencies to break down the “barriers to refinancing [that] blunt the transmission of monetary policy to the household sector.”
That’s the funny thing about monetary policy. It’s a fickle beast. Printed money sometimes (always) finds its way into the areas not intended by its purveyors.
After having successfully recapitalized U.S. financial institutions through an unprecedented bailout operation, brought treasury yields to negative returns with the yield curve topping out at sub 3 percent levels in a 3.5 percent inflationary environment, and greased the wheels for an explosion of credit, for whatever reason, Bernanke has been stumped. His monetary flood corked. Housing is in decline.
The one asset Bernanke has targeted following making bankers whole is not cooperating. The only things successfully reflated, albeit unintentionally and certainly not desired, have been food, energy, and capital markets.
Never to be defeated, and always determined to achieve his desired result, Bernanke would be very comfortable, as would his entire new board, launching a third round of easing, QE3, which many foresee occurring in the near future. However, today’s political environment and media may very well bring pitch forks and torches to the Fed’s front door. The move would certainly seal his removal as Fed chair.
As such, Bernanke is resorting to alternatives.
In his paper, he advocated a number of policy options including a gross expansion of the loan modification (principal reduction) and refinancing programs, significantly expanding the GSE balance sheets to include more heavily levered loans and loans to subprime borrowers, and lastly a huge foray for the government to become the nation’s largest landlord through land banks and REO renting.
Where to begin?
First off, none of this should come across as reassuring. The loan modifications and refinancing programs in place, HAMP and HARP, have been failures, and any expansion of them will lead to further failures or much worse could create moral hazard for current borrowers to fall behind on payments or strategically default. Just listen to what Bernanke himself has to say of the idea: “lenders are unlikely to be willing to make such modifications on their own. Moving further in this direction is thus likely to involve additional taxpayer funding, the overriding of private contract rights, or both.” Sounds like government business as usual to me.
Secondly, aren’t highly levered loans and loans to subprime borrowers purchased by government enterprises what got us into this mess in the first place? GSEs are supposed to be being wound down to allow private players into the market, not beefed up to continue down the same path of boom and bust.
Third, land banks, really!?
The GSEs and other financial institutions are sitting on an ocean of foreclosed properties. As they sit vacant, they deteriorate, lose value, and bring down the values of homes in their vicinity. To alleviate these issues, Bernanke advocates that the government institute land banks and other rental programs that put Uncle Sam in the slum business. Other ideas include giving big, established property managers a silver platter deal of taxpayer subsidized properties to manage for profit. Can you say crony capitalism?
Understand that ultimately price is the one and only thing to will clear us of the housing issue. The constant push for government to step in the way and control the uncontrollable will merely prolong the problems and stunt future growth. Bernanke himself acknowledges this in his paper, though I doubt he even realizes it. He says: “Nonetheless, some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”
That very well may be the only line of sense to come of all 26 pages, but at least it’s in there. Prices clarify and allow for participation and a fully functioning market. If they fall, buyers will once again come to market and begin drying up that ocean of bloated housing boom inventory. Recovery will follow swiftly.
One last word of caution: Bernanke is the Chairman of the Federal Reserve. He is charged with controlling our, and arguably the world’s, money supply, monitoring inflation, and creating a predictable and stable environment for exchange. He is neither a mortgage broker nor a landlord. Housing represents more than two-thirds of a majority of Americans’ wealth, and he is now advocating for its control. This is extremely disconcerting. Total control over America’s money and now too America’s largest asset by a handful of individuals should not be welcoming to anyone.