The Federal Reserve until recently has jealously guarded its independence from politics by focusing attention exclusively on monetary policy. Wisely, it has sought to distance itself from fiscal policy which is a central responsibility of the political process.
No longer! Federal Reserve Governors and senior Federal Reserve policy-makers are now actively urging the fiscal authorities to advance socialism through redistribution policies.
“William Dudley, president of the Federal Reserve Bank of New York, said on Friday that taxpayers and mortgage bond investors should shoulder the cost of reducing borrowers’ loan principal. Sarah Bloom Raskin, a member of the Federal Reserve’s board of governors, added on Saturday that forcing leading banks to cut mortgage principal as a penalty for poor practices was an option ‘that should stay on the table’ …according to Federal reserve policymakers, the US Congress and the Obama administration should adopt new programmes that make it easier for troubled borrowers to keep their homes and potential homebuyers to obtain loans.” Shahien Nasipour, ‘Call for US taxpayers to help borrowers’, Financial Times, January 9, 2012
The Federal Reserve confronts a problem in trying to resuscitate the US housing market (and construction industry) via monetary policy. Its interest rates are already near-zero, leaving the Fed with few options. An explicit policy of driving up inflation would contravene its own mandate and provoke a political backlash from creditos across the nation. So the Federal Reserve falls back on crude socialism to put the housing market on life support.
In so doing, the Federal Reserve takes a wrong fork in the road. The US housing market suffers not from a deficiency, but from an excess, of political intervention. A sequence of vote-seeking US presidents and of vote-seeking US congressmen have intervened shamelessly over four decades to drive up the rate of home ownership among households unfitted by reason of income or imprudence from assuming additional debt. The 2007-8 bubble burst exposed such shameless chicanery. Since then attempts to prop up house prices by government intervention have slowed the rate of market adjustment. That is why the housing market remains in the doldrums.
The medicine required to clear the market is simply to allow average US house prices to fall to clearing levels as some 4 million excess homeowners are returned to a newly-vibrant rental market. The Federal Reserve has no role to play in this market process, which lies outside its mandate and (evidently) outside the competence of its Governors.
Why should US taxpayers be on the hook for imprudent decisions by would-be homeowners who entered into non-sustainable contracts and for selfish interventions by corrupt politicians who garnered votes by pressuring government agencies to extend loans to the indigent and the reckless.