Election year politics cloud Federal Reserve housing plan
By Mark Felsenthal and Margaret Chadbourn ,Reuters
February 22, 2012, 12:03 am TWN
WASHINGTON -- In mid-2011, with the U.S. economy at risk of a new recession, top Federal Reserve officials began to explore a different way to shore up the recovery: looking for fixes for the battered housing market.
The central bank had just wrapped up US$2.3 trillion in bond purchases in an unprecedented attempt to snap the United States out of its economic blues.
But its efforts were being frustrated. With nearly one in four Americans owing more on their mortgages than their homes were worth, millions remained locked out of credit markets and unable to reduce the cost of their loans.
The Fed's board in Washington gathered a task force of around 30 staff and put them to work far from the public gaze on ways to turn around the worst housing slump in generations.
More than six months later, the central bank surprised lawmakers with a string of proposals, including deploying the firepower of the massive U.S. housing finance agencies Fannie Mae and Freddie Mac to help struggling homeowners.
But rather than spurring fresh debate among decision-makers in Washington on how to fix the housing market, the Fed put itself in the sights of Republicans angry at what they saw as election-year meddling, an intrusion on Congress' turf and a veiled attempt to further the Obama administration's agenda.
"I was truly taken aback when just recently, as you know, the Fed issued an unsolicited white paper ... on housing policy where, if you didn't advocate for, you certainly mirrored much of the positions of this administration," Republican Representative Scott Garrett told Fed Chairman Ben Bernanke.
"Why would you issue such a paper when we don't ask for it?"
Bernanke was in an uncomfortable spot, and he issued what amounted to a rare public apology at the Feb. 1 hearing.
"We were trying to provide pros and cons, analysis, background — I'm sorry if you think we went too far," he said.
Fed officials were taken aback by the hostile reaction. They say they intended their work to be a good-faith effort to pinpoint policy changes that could help the shell-shocked economy. The 33-percent plunge in U.S. house prices since 2006 has wiped out an estimated US$7 trillion in wealth.
Their political miscalculation may have undermined one of their main hopes: building bipartisan consensus around ideas that could get the housing market off the ropes.
"It wasn't that hard to predict that if you put out a white paper with specific housing proposals that are very political, you're going to get a political reaction and that might in fact not be productive," said former Fed staffer Julia Coronado, now chief North America economist for BNP Paribas in New York.