Wikinvest Wire

Nationalization or monetization?

Monday, April 14, 2008

Fortunately, given the rate at which home prices are now declining in many parts of the country, any government action in support of home prices is likely to be far too little and far too late, but it doesn't stop people from asking the predictable question:

Should the government nationalize the mortgage lending industry or just monetize vast portions of the nation's housing market?

According to John Makin in this WSJ op-ed piece, it should by the latter. After all, the implied motto of the Federal Reserve over the last two decades has clearly been, "When in doubt, create more money".

The policy alternatives in the post-housing-bubble world are painfully unpleasant. In my view, the least bad option is for the Federal Reserve to print money to help stabilize housing prices and financial markets. Yes, use reflation to soften the pain for Main Street and Wall Street. If instead we let housing prices fall another 25%-30% – as predicted by the Case-Shiller Home Price Index – it's almost certain that Washington will end up nationalizing the mortgage business.
Fed reflation – to slow the fall in home prices and alleviate the distress for households and lenders – carries many risks. But the alternative is to struggle with a patchwork of inadequate efforts to shore up mortgage markets, while the Fed sticks to its current tactic of pegging the fed funds rate without increasing the money supply. This, I would submit, is even more risky. It risks a severe recession that will only intensify the drive for reregulation of financial and mortgage markets after the election.

Printing money is a radical step that enables the Fed to stop pegging the federal-funds rate and start increasing market liquidity directly.
While there is a substantial risk that inflation may rise for a time – this would be the policy goal – monetization is more easily reversible than nationalization of the mortgage market. Meanwhile, Fed officials concerned about inflation should rethink their view that it is impossible to identify an asset bubble before it bursts.

The postbubble period has yielded some very unattractive policy alternatives. They clearly underscore the rationale for having the Fed target asset prices – in a world where asset markets affect the real economy more than the real economy affects asset markets.
Who would have thought that asset prices would produce an equal (or greater) amount of pain on the way down as they produced pleasure on the way up?

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Anonymous said...

Answer to last question: Anyone who has read Grant's the last few years. Get Real.

Pool Shark said...

From the point of view of the average homeowner, the pain will be far greater on the way down than the pleasure was on the way up.

Much of the 'pleasure' on the way up was siphoned-off by mortgage brokers, bankers, realtors, and title & escrow companies. Therefore, the homebuyer didn't reap the full benefit of housing appreciation; but they will shoulder the full extent of housing's devaluation.

Once the housing market comes full circle from boom to bust, the homeowner will find himself even poorer than at the beginning of the cycle.

Tim said...

I had the "(or greater)" qualifier in there originally, then I took it out. I just put it back in...

Anonymous said...

Is this guy nuts??! Did he really just suggest, ON THE WSJ, that we monetize the debt???!

Holy Jeez, I knew Rupert Murdoch was nuts but this is just plain insane. Any foreign investor reading this article will flee from the dollar at the slightest hint of this happening.

I might throw up now.

donna said...

Really, really Bad Idea.

We need real economic solutions, not more bubble inflation or re-flation.

This is just getting ridiculous now.

little larry sellers said...

"...while the Fed sticks to its current tactic of pegging the fed funds rate without increasing the money supply."

Did Malkin REALLY just claim that the current strategy is to not increase money supply?!? If only we had official M3 figures to show him. Ironically, those figures would still be available if the Fed hadn't scuttled them in an attempt to hide how rapidly money supply was increasing.

Zeke said...

On the one hand, massive inflation (the authors preference) on the other he proposes nationalization of the mortgage market. Other than destroying the illusion that we're all operating as part of some free-market lassie-faire system, why is that such a big concern?

Why would nationalization of the mortgage system be such a bad thing? The whole central banking system is turning out to be as broken and corrupt as its most off the wall critics have claimed.

The internet has allowed disintermediation of every other industry - from PC's to music - but for some reason in banking we are wrong to suggest that perhaps there is some better system then giving the exclusive control of the creation of money to the heirs of JP Morgan and other insiders at the Fed.

The US Government seems to have no problem keeping track of a few hundred million of us when it comes to collecting taxes. Why the big problem with them making home loans directly.

As more and more consumers face absurd credit card rates (32%!!) based on absurd violation of every changing, and completely arbitrary rules the sympathy for big banks will go from low to no.

Anonymous said...

Re inflating cannot work without lenders lending. That's basically where we are now. Low rates but no one is lending.

It's a terrible idea anyways.

staghounds said...

"monetization is more easily reversible than nationalization of the mortgage market"

How can this idiot say one is easier than the other, when neither has yet happened in the recorded history of man?

The banking and lending industry has been nationalised for a looooong time. You can argue whether that happened in 1913, 1932, or 1972. But the Federal reserve runs the banking industry and it's neither private nor voluntary.

Only one part of the banking / lending industry is not nationalised- the bit with profits.

Which is Zeke's point.

Why do we, the people, create money, "lend" it to banks at 2.25%, and then borrow the money we just created from the banks at 6%?

That wouldn't make sense for me to do-lend my neighbour money at 2.25 then borrow it back from him at 6. It's always struck me that a bad individual financial practice is a bad governmental one too.

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