Tuesday, September 29, 2009

TARP is Expanding; Housing Subsidies Too

Since the economy is beginning to recover, U.S. policy should be winding down TARP, right? And we should be ending mortgage subsidies to less credit-worthy borrowers, since that policy played a crucial role in causing the crisis in the first place, right? Well, guess again:

The Obama administration is close to rolling out two initiatives aimed at addressing lingering problems from the financial crisis: A long-delayed effort to cleanse financial firms of their toxic assets, and a $35 billion plan to prop up state programs that help lower-income borrowers get affordable mortgages.

This makes no sense.

The argument made last fall for having Treasury buy toxic assets from banks was that, if banks had been forced to sell then, they would have received "firesale" prices due to the crisis. This would allegedly have pushed more banks to fail, with negative repercussions for the credit system.

That argument is irrelevant now. Panic is over. If banks own assets that investors will buy only at heavily discounted prices, that is because these assets are not worth much. Let the banks take the losses; TARP purchases are just further bailout for the banks.

Propping up state "affordable" mortgage programs will help generate the next crisis by encouraging homeownership among people who cannot afford it. All affordable mortgage programs should be phased out, not expanded.

14 comments:

Anonymous said...

Your libertarian point of view of refreshing. I hope that you post about the NYTimes story this morning regarding the new LACK of freedom of choice to buy an insurance plan that includes every range of reproductive services.

Jess Austin said...

There are two parties to the purchase of a service. If no one offers you the coverage you want at the price you bid, that IS freedom, for the insurers, not to sign contracts at ruinous terms. You, in turn, are free to either bid more money or expect less service.

If insurers would happily offer your preferred coverage, but for some unfair action on the part of a third party, please tell us. Many libertarians would join you in deploring such market interference. Depending on the form of the interference, some would even countenance regulatory action to stop it.

Sorry this comment and the original comment to which it responds are quite off the topic of the original post, although since Prof. Miron seems not to read his comments that may be excusable.

Anonymous said...

Federal Reserve Bank of Boston
Memo dated April 2009 - The Impact of Recent Credit Market Turmoil on New England State Housing Finance Agencies

Is it propping up the HFAs or is trying to rectify an oversight. Haven't the Feds heavy purchasing of MBSs via Fannie & Freddie kept interest rates artificially low crippling the Agencies?

Then there the need to have someone step in to act as a liquidity provider. I was under the impression that after liqudity facility providers were downgraded last fall, that regulations prevented entities such as Money Market funds from holding assets in which a liquidity provider does not have the appropriate rating.

Also, I believe most Agencies service the loans they originate so there's an inducement to keep loan losses to an acceptable tolerance. Agency default and foreclosure ratios have been lower than other affordability programs offered by Fannie/Freddie or insured by FHA or USDA.

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