“Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the United States for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy, and particularly consumer spending, will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: ‘This is not a monetary problem.’ ” The Institutional Risk Analyst, October 28, 2010
“Bagehot’s name has surfaced in a few editorials in recent weeks, but they have invariably focused on the ‘lend freely’ portion of his advice, while overlooking Bagehot’s admonition to impose costs, capital requirements, and other safeguards where public funds are concerned. In short, liquidity should be available to Fannie Mae and Freddie Mac, but the interest rates charged should be very high.” John Hussman, Hussman Funds, July 2008
Because the United States government is unwilling to recognize that the central weakness of the United States economy is the unresolved collapse of the housing market, three simply dreadful policy interventions continue to be imposed on a shaky economy. First, quantitative easing is doubled and tripled by the Federal Reserve to prop up large banks that show no signs of real life. Instead those poorly performing banks – saddled as they are with toxic securitized mortgage assets – should long ago have been forced into liquidiation by ‘penal ‘lender-of-last-resort interest charges imposed by a Bagehot-respecting Federal Reserve.
Second, all kinds of political pressure are being exerted on mortgage lenders to avoid orderly foreclosure proceedings against delinquent borrowers. Instead, the government should be encouraging mortgage lenders to foreclose as swiftly and efficiently as possible in order to terminate price uncertainty in the housing market, and to encourage potential new homeowners to enter the market on a correctly funded basis at realistic interest rates.
Third, the Department of the Treasury and the Federal Reserve are conspiring to prop up Fannie Mae and Freddie Mac in the teeth of the market reality that both GSEs are technically bankrupt, and can never recover. Instead, the Fed should be refusing them any access to ‘lender of last resort’ borrowing , even at penal rates, on the ground that they are insolvent, not simply illiquid, thus forcing the Treasury Department to place them into bankrupcty.
Only when the housing market is restored to equilibrium will economic stagnation truly end. That was a lesson of the Great Depression that goes apparently unnoticed by a vote-hugging Obama administration. The housing market will return to equilibrium only when those households that are unable to meet their mortgage obligations, for whatever reason, are confronted with foreclosure, and are returned to the rental markets whence they came, albeit under government mis-representation, if not outright fraud, during the exuberant noughties.