The White House has a good set of ideas out this AM to a) help the housing market and b) help small businesses and start ups. The former sounds good to me; the latter, less so.
First, the economics, then the politics (you can decide whether that's spinach first or dessert first).
An important exit ramp from recession to recovery is low interest rates, aka monetary stimulus. These feed into low mortgage rates, which are currently at historic lows (30-yr fixed around 4%). That chain of events has historically provided a strong incentive for recovering households to refinance their mortgage loan or take out a new one and buy a home.
But this exit ramp has been blocked by the fallout from the housing bust, including risk aversion in credit markets, the supply overhang of homes, continued home price declines (can we carve out a bottom already!?!), and all those underwater mortgages (which block refinancing).
Many conservatives -- not all -- just want to punt on this problem (Gov Romney stands firmly in that camp). That's not crazy, in the sense that in normal times, we don't need new policy to help creditworthy borrowers refinance.
But these are not normal times. Such borrowers are blocked due to the problems just noted, particularly underwater mortgages and risk aversion by lenders, who've gone from massively underpricing risk to overpricing it.
Still, the obvious pushback here is that this isn't the first time the admin has made a run at this problem and so far, most of what we've seen has been underwhelming. Why might this time be different?
One potentially helpful wrinkle is extending federally insured refinancing (the Federal Housing Authority would insure the new loans, incentivizing risk averse banks to undertake them) to a large group of homeowners who have heretofore been ineligible.
From a good discussion on the policy in the Wall Street Journal:
The new initiative would extend that opportunity to roughly one-third of all mortgages that aren't backed by federal entities and instead are owned by banks or were bundled by private firms that sold them off to investors as mortgage-backed securities. The Federal Housing Administration would instead guarantee the new loan.
Two caveats, the latter of which is very large. First, will the banks and servicers play along? That's always been the rub here. The White House has streamlined the process -- paperwork around eligibility criteria has jammed the HAMP program from the getgo -- but thus far, we've seen a consistent lack of interest by private lenders (and by the government sponsored entities too, but that's another issue -- see here).
Second, the Federal Housing Authority needs capital to offset the risk they're taking on by insuring the banks holding the new mortgages. To raise those funds, the bill calls for a fee on large financial institutions (banks, investment houses), specifically on their leverage. This actually strikes me as a fair way to connect the dots between the housing/finance meltdown/bailout and measures to address the damage.
But this Congress is... um... very unlikely to pass it.
More to come on the small biz stuff out today... it's got some decent ideas re private funding for startups but there's also more political candy in there than bang-for-the-buck on jobs.
The system seemed fine until you want to change the ownership. You could easily buy a home today and receive a worthless title from the bank that sold it to you. There is only one way out. Washington has to step in and force the banks to undo the mess they created. But as long as the mortgage is viable, there is no loss. If you unscramble the mess, someone has to eat the loss on the loan. Lobbyists will fight that one out until the end of times.
Bottom line: If you are significantly underwater? Walk away. Hand the mess back to the bank that broke the system.
The risk aversion is actually on the part of qualified purchasers. Many people are paying 1.5-2X as much in rent as they would be to buy because they don't want to get burned by falling real estate prices, job-loss induced economic crisis, etc. As the REO pipeline opens to dump real estate into the market, there will be continued downward price pressure in most markets.
That is, in the vernacular, your problem right there.
The admin had a program to face a similar problem in the auto market: "Cash for Clunkers". You traded in a qualified used car, got a very nice chunk of cash, and the dealer was obliged to crush your trade in. This gave the industry a temporary boost that immediately subsided as soon as the incentive stopped. This should give us a clue what the government should do this time.
Nothing. The government should "regulate, oversee, and enforce" good standards on the financial industry, and then stop right there. Whatever solution the government imposes will be both unsustainable and distorting. Make sure the industry is operating at the highest standards of business ethics, and then let the market value to assets and risk.
Regards.
"Demand creates growth, not capital." - - - Read my micro-bio.
"Capital is like a catalyst: a small amount is necessary to a chemical reaction, adding more does nothing and can even slow the reaction." - - - There's just enough truth to this that a nuanced answer to a complex situation is required. Used productively, capital multiplies productivity. A worker with a pick and shovel is more productive than a worker using her bare hands. The "right" amount of capital is that which is required to achieve the optimum level of productivity. Labor + capital + innovation + technology + design + marketing + consumer finance + transportation + a whole lot of other things = prosperity.
Capital arises from either taking on debt or diluting equity. Debt capital (for the US, not so much for Greece, Portugal, Italy, Spain, and so on) is cheap today because the Fed is making it cheap. The Fed is making debt capital cheap for two reasons: 1) to try to drive people into equities (by making returns on equity more attractive than returns on debt) and 2) to finance the US government, because we're 2% away from catastrophe.