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Meddling worsens housing market
By Joseph E. Stiglitz |
September 13, 2010, Monday
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Print Edition
Print Edition
IN the United States today, one out of six workers who would like a full-time job can't find one. It is an economy with huge unmet needs and yet vast idle resources.
The housing market is another US anomaly: there are hundreds of thousands of homeless people (more than 1.5 million Americans spent at least one night in a shelter in 2009), while hundreds of thousands of houses sit vacant.
Indeed, the foreclosure rate is increasing. Two million Americans lost their homes in 2008, and 2.8 million more in 2009, but the numbers are expected to be even higher in 2010.
None of this is news. What is news is the Obama administration's reluctant and belated recognition that its efforts to get the housing and mortgage markets working again have largely failed.
Curiously, there is a growing consensus on both the left and the right that the government will have to continue propping up the housing market for the foreseeable future. This stance is perplexing and possibly dangerous.
It is, however, an understandable position: both US political parties supported policies that encouraged excessive investment in housing and excessive leverage, while free-market ideology dissuaded regulators from intervening to stop reckless lending.
Distortion
If the government were to walk away now, real-estate prices would fall even further, banks would come under even greater financial stress, and the economy's short-run prospects would become bleaker.
But that is precisely why a government-managed mortgage market is dangerous. Distorted interest rates, official guarantees, and tax subsidies encourage continued investment in real estate, when what the economy needs is investment in, say, technology and clean energy.
Moreover, continuing investment in real estate makes it all the more difficult to wean the economy off its real-estate addiction, and the real-estate market off its addiction to government support.
Befuddled
Supporting further real-estate investment would make the sector's value even more dependent on government policies, ensuring that future policy makers face greater political pressure from interests groups like real-estate developers and bonds holders.
Current US policy is befuddled, to say the least. The Federal Reserve Board is no longer the lender of last resort, but the lender of first resort. Credit risk in the mortgage market is being assumed by the government, and market risk by the Fed.
No one should be surprised at what has now happened: the private market has essentially disappeared.
The government has announced that these measures, which work (if they do work) by lowering interest rates, are temporary.
But that means that when intervention comes to an end, interest rates will rise - and any holder of mortgage-backed bonds would experience a capital loss - potentially a large one.
No private party would buy such an asset. By contrast, the Fed doesn't have to recognize the loss; while free-market advocates might talk about the virtues of market pricing and "price discovery," the Fed can pretend that nothing has happened.
With the government assuming credit risk, mortgages become as safe as government bonds of comparable maturity.
In short, government policies to support the housing market not only have failed to fix the problem, but are prolonging the deleveraging process and creating the conditions for Japanese-style malaise.
(The author is university professor at Columbia University and a Nobel laureate in economics. Copyright: Project Syndicate, 2010. www.project-syndicate.org. Shanghai Daily condensed the article.)
The housing market is another US anomaly: there are hundreds of thousands of homeless people (more than 1.5 million Americans spent at least one night in a shelter in 2009), while hundreds of thousands of houses sit vacant.
Indeed, the foreclosure rate is increasing. Two million Americans lost their homes in 2008, and 2.8 million more in 2009, but the numbers are expected to be even higher in 2010.
None of this is news. What is news is the Obama administration's reluctant and belated recognition that its efforts to get the housing and mortgage markets working again have largely failed.
Curiously, there is a growing consensus on both the left and the right that the government will have to continue propping up the housing market for the foreseeable future. This stance is perplexing and possibly dangerous.
It is, however, an understandable position: both US political parties supported policies that encouraged excessive investment in housing and excessive leverage, while free-market ideology dissuaded regulators from intervening to stop reckless lending.
Distortion
If the government were to walk away now, real-estate prices would fall even further, banks would come under even greater financial stress, and the economy's short-run prospects would become bleaker.
But that is precisely why a government-managed mortgage market is dangerous. Distorted interest rates, official guarantees, and tax subsidies encourage continued investment in real estate, when what the economy needs is investment in, say, technology and clean energy.
Moreover, continuing investment in real estate makes it all the more difficult to wean the economy off its real-estate addiction, and the real-estate market off its addiction to government support.
Befuddled
Supporting further real-estate investment would make the sector's value even more dependent on government policies, ensuring that future policy makers face greater political pressure from interests groups like real-estate developers and bonds holders.
Current US policy is befuddled, to say the least. The Federal Reserve Board is no longer the lender of last resort, but the lender of first resort. Credit risk in the mortgage market is being assumed by the government, and market risk by the Fed.
No one should be surprised at what has now happened: the private market has essentially disappeared.
The government has announced that these measures, which work (if they do work) by lowering interest rates, are temporary.
But that means that when intervention comes to an end, interest rates will rise - and any holder of mortgage-backed bonds would experience a capital loss - potentially a large one.
No private party would buy such an asset. By contrast, the Fed doesn't have to recognize the loss; while free-market advocates might talk about the virtues of market pricing and "price discovery," the Fed can pretend that nothing has happened.
With the government assuming credit risk, mortgages become as safe as government bonds of comparable maturity.
In short, government policies to support the housing market not only have failed to fix the problem, but are prolonging the deleveraging process and creating the conditions for Japanese-style malaise.
(The author is university professor at Columbia University and a Nobel laureate in economics. Copyright: Project Syndicate, 2010. www.project-syndicate.org. Shanghai Daily condensed the article.)
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