And they came up with ….
WASHINGTON — Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.
So, you know, there you go. It’s this kind of clear-headed thinking that makes our regulators the envy of the world’s regulators.
“Sooner or later, government will want to raise funds without imposing taxes. It will want to spend money it does not have. So I hesitate to join those who are predicting two percent inflation for the next 20 years. The temptation for government to lay its hands on that money is going to be very hard to resist. The fundamental problem is that you shouldn’t have an institution such as the Federal Reserve, which depends for its success on the abilities of its chairman. My first preference would be to abolish the Federal Reserve, but that’s not going to happen.” – Milton Friedman (h/t Professor Lawrence H. White)
The Special Inspector General of TARP says (click through for handy chart):
Supporting home prices is an explicit policy goal of the Government. As the White House stated in the announcement of HAMP for example, “President Obama’s programs to prevent foreclosures will help bolster home prices.”
In general, housing obeys the laws of supply and demand: higher demand leads to higher prices. Because increasing access to credit increases the pool of potential home buyers, increasing access to credit boosts home prices. The Federal Reserve can thus boost home prices by either lowering general interest rates or purchasing mortgages and MBS. Both actions, which the Federal Reserve is pursuing, have the effect of lowering interest rates, which increases demand by permitting borrowers to afford a higher home price on a given income.
Similarly, the Administration is boosting home prices by encouraging bank lending (such as through TARP) and by instituting purchase incentives such as the First-Time Homebuyer Tax Credit. All of these actions increase the demand for homes, which increases home prices. In addition to direct Government activity, home prices can be lifted by general expectations among homebuyers of future price increases.
Does anyone out there share my fear that “expectations among homebuyers of future price increases” will be increasingly determined by government subsidies and programs rather than, say, what homes are actually worth? And if that’s the case, shouldn’t we expect another crash … or, failing that, another couple trillion dollars of ill-conceived borrowing to prop up a housing market overdue for another crash?