Election year politics cloud Federal Reserve housing plan
By Mark Felsenthal and Margaret Chadbourn ,Reuters Wednesday, February 22, 2012, 12:03 am TWN
The Fed ran headlong into a culture clash between its own cerebral, deliberative norms and the sound-bite driven, polarized election year political environment on Capitol Hill.
The interest-rate sensitive housing sector usually helps lead economic recoveries, but this time was different.
Two years after the economy bottomed out, even with interest rates around record lows, housing remained in the tank.
As Fed officials studied how long it took for credit to recover after recessions, they were struck by parallels between the residential mortgage markets of today and the commercial mortgage markets that went bust in 1991. Then, it took 10 years to achieve a full recovery.
One former Fed official who spoke on condition of anonymity said central banks have an obligation to think through all the factors that are holding back economic growth.
At the same time, he said, it was unclear why the Fed felt compelled to outline potentially controversial ideas for Congress, especially during an election year when it was highly unlikely any legislative solutions would gain traction.
The Fed has a dual mandate to keep inflation at bay while ensuring the fullest possible employment.
Bernanke, first appointed by Republican President George W. Bush, is acutely aware of the risks to the Fed's independence from appearing to take political sides. He had already drawn political fire for bailing out banks during the financial crisis, and for courting inflation and veering into fiscal policy with the Fed's bond buying.
Republicans viewed the housing white paper as another instance of Fed overreach.
Among other ideas, the central bank suggested that Congress and regulators could expand the scope of government-run Fannie Mae and Freddie Mac to help more homeowners refinance.
The firms have already been propped up with US$169 billion in taxpayer aid, making them a target of fierce criticism from Republicans angry at the government's role in the economy.
The agencies would likely have to accept more near-term losses as the cost of fostering a stronger housing recovery but they would eventually benefit, the Fed said.
"The unveiling of your staff's housing white paper ... treads too far into fiscal policy, and runs the risk of being perceived as advocacy for particular policy options," Republican Senator Orrin Hatch wrote to Bernanke.
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