The Washington Post's Tortured Logic On the Fed's Housing Proposals

The lead Washington Post editorial noted (and excused) the Fed's complete failure to understand the dangers posed by the housing bubble (the economy is soooo complicated) and then somehow used this failure as an argument against its housing proposals. The Fed's main housing proposals were that Fannie and Freddie should make it easier for underwater homeowners to refinance and also that they should look to convert some of their foreclosed properties to rental units. The Fed also suggested that it might be advantageous to allow foreclosed homeowners to stay in their home as renters. (Yes, that one is my right to rent plan.)

The Post doesn't like the plans because the government could lose money on the deals. They also say that they may not fix the housing market.

Let's take these in turn. In answer to the first, the question is how much money does the government stand to lose by allowing homeowners who are already underwater to refinance at lower rates. Remember, we are already on the hook for the loans. The deal is simply that homeowners will now be paying lower interest to holders of mortgage backed securities, or in cases where Fannie and Freddie held the loans directly, to the government. The downside risk to the government seems pretty small and, as the Fed noted, if it reduces the default rate, then it could be a net gainer. Of all the ways in which we can conceivably help homeowners, this one should top the list as no-brainer.

The question about fixing the housing market depends on what we mean by "fixing?" There was a housing bubble. It burst. Does the Post think that we will get house prices back to their bubble-inflated levels? That is probably not possible and certainly not desirable. If the point is to get homes occupied and to allow people who are no longer homeowners to find good rental housing, then again the Fed's proposals seem like no-brainers.

The Fed deserves tons of ridicule; letting the housing bubble grow to such dangerous levels was an act of ungodly stupidity. But its latest proposals on housing are definitely a step in the right direction.

IT'S THE MORAL HAZARD STUPID!
written by izzatzo, January 15, 2012 9:10 AM

Stupid liberals.

-4

You've got to be kidding me, izzatzo
written by Hypoxia Smith, January 15, 2012 2:33 PM

As long as the government is allowing our nation's financial institutions to remain dangerously over-leveraged, I think we can afford to spread some 'moral hazard' to the citizenry in the form of refinancing and owner-to-renter policies.

Relationship between over-leveraged banks and moral hazard.
written by Hypoxia Smith, January 16, 2012 11:54 AM

To finish the logical chain missing from my earlier email, the 'moral hazard' in allowing our nation's financial institutions to remain over-leveraged is the implicit guarantee of a government bailout in the event the banks' bets once again go bad.

The Washington Post's Tortured Logic On the Fed's Housing Proposals

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