Election year politics cloud Federal Reserve housing plan
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.
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.
Duty to Share
Bernanke stressed that the white paper — one of only a handful the Fed has produced in recent years — was drawn up in response to inquiries from Capitol Hill and elsewhere.
Last October, at a closed-door meeting with Senate Democrats, Bernanke was pressed on housing. He told lawmakers the central bank would likely soon have ideas to share, according to two senators he spoke with.
The release of the report, however, took months as it got caught in the Fed's internal vetting process. Bernanke paid careful attention to every detail, and penned his own letter to attach to the paper.
Former Fed Governor Mark Olson said the central bank likely felt a duty not only to dig into what was holding back a housing recovery, but also to share its findings.
“When you've assembled research like that, it has limited value if you keep it to yourself. The value is putting it out for public discussion and hopefully implementation,” he said.
Fed Governors Elizabeth Duke and Sarah Raskin oversaw the effort. Duke, a Bush appointee, was a former community banker who had seen what could happen when banks became saddled with foreclosed properties. Raskin, appointed by Obama, was a former state banking regulator who had focused on mortgage servicing issues since joining the Fed.
An assistant director of research at the Fed, Karen Pence, led the group of staff which combined economic and regulatory skills. Pence had studied the rise in mortgage defaults and investigated subprime mortgages in two papers published in 2009.
“We as a nation currently have a housing market that is so severely out of balance that it's hampering our economic recovery,” Duke told a Fed housing conference in September.
In her remarks, which aired some of the proposals eventually included in the white paper, she called for eliminating the obstacles that were preventing millions of homeowners from refinancing into cheaper mortgages, a signal of support for an Obama administration plan to revamp the government's main refinancing initiative.
She also suggested making it easier for Fannie Mae and Freddie Mac — which along with the Federal Housing Administration own about half of all foreclosed properties in the United States — to convert those units into rentals, an approach the Obama administration was already considering.
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