“Buying Too Many Votes — er, Mortgages?”
Dear Jack: Don’t buy a single vote more than necessary. I’ll be damned if I am going to pay for a landslide.”
–JFK quoting a made-up telegram from his father, Joseph Kennedy
What recalls the above anecdote is Ben Bernanke’s so-far successful efforts to keep mortgage rates low — now under 5% again — and therefore provide support to the embattled housing market.
But in committing $1.25 trillion to the effort — apparently, the Fed has already deployed more than two-thirds of that — is Bernanke guilty of “buying too many votes?”
If low mortgage rates help the housing market, and a strong housing is good for the economy, what’s the harm?
In fact, I see three problems with such heavy, government intervention.
One. It’s expensive.
The cost of a $1.25 trillion program to buy up mortgages is, well . . $1.25 trillion. Even that understates the cost of government housing subsidies today.
Throw in the tens of billions pumped into Fannie Mae and Freddie Mac, the cost to the Treasury of the $8,000 tax credit to first-time home buyers, the billions being lined up now to replenish a depleted FHA . . . and the total cost is truly staggering.
Two. Scaling back long-established government subsidies is economically — not to mention politically — tricky.
One of the “lessons” supposedly learned from The Great Depression is that withdrawing government help prematurely caused the economy to relapse in 1937.
So too, today’s Op-Ed pages are full of competing arguments that even more must be done to nurse the economy back to health, vs. those arguing that the government has already massively overreacted.
Three. Slippery Slope (or, “Target Levels for . . . Everything?”)
Philosophically, what’s the difference between the government buying up mortgages to support the housing market . . . and buying up equities to support the stock market?
Or, say the government wanted to knock down the price of gold. Why not just start selling from U.S. stockpiles (or announce that it intended to)?
Would we even know if that was happening?
In my experience, markets are messy, constantly gyrating as they absorb new information.
Now consider all the “un-messy” century marks currently on display: S&P 500: 1,000; Dow Jones Industrial Average: 10,000; Nasdaq: 2,000; gold: $1,000/oz.
Technical analysts no doubt can explain the foregoing simply as evidence of the market’s affinity for round numbers, both as “support levels” and ceilings.
Still, it gives you pause.
Housing Market Subsidies: “Sauce for the Gander?”
So, do I have any brilliant recommendations?
In a perfect world, the housing market would function with few or no government subsidies.
However, in a perfect world, the financial system would never melt down, nor would the government throw ten trillion (!) or so into recapitalizing the institutions that crashed it.
In an environment where so-called Too Big to Fail financial institutions are getting trillions, I have no problem with billions in housing subsidies.
There’s no doubt in my mind that the latter is a better investment.