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A modest alternative to QE2

By Holden Lewis ·
Wednesday, September 22, 2010
Posted: 9 am ET

Mortgage rates have hovered near 4.5 percent for weeks. If mortgage rates dropped even lower, would that compel you to buy a house?

Probably not, right? If you're looking for a house now, then mortgage rates are low enough. If you're not shopping for a house right now, high mortgage rates aren't the reason. Maybe you're satisfied with your living arrangements, or you're upside-down on your house, or you're waiting for house prices to fall even further.

Yesterday the Federal Reserve implied that it's ready to try another round of quantitative easing (dubbed "QE2" by some observers), a way of dumping money into the banking system to send long-term interest rates lower. I question the effectiveness of this. Few houses and cars are being sold, and I don't think buyers are shutting their checkbooks because interest rates are too high.

In my translation of what the Fed said, notice that the Fed mentioned the danger of deflation in two of the six paragraphs.

Paragraph 2 is entirely about the Fed's perception of the danger of falling prices. "Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate."

My colleague Greg McBride noticed this emphasis on deflation, too.

Chairman Ben Bernanke is a scholar of the Great Depression, and he wants to avoid that era of falling prices. When prices fall, people wait to buy things. As people wait, producers and sellers lose jobs. With less money circulating in the economy, prices fall even more, and a vicious circle is created.

We already have deflation in housing, and home sales have plunged. If the Fed wants to spark the housing sector, forcing rates lower isn't the way to go. Instead, it might be more effective for the central bank to buy huge numbers of foreclosed houses at slightly elevated prices, igniting consumer demand. The Fed could sell the houses over the next decade and maybe even make a profit.

Not gonna happen, of course. But buying up empty houses would probably be more effective than quantitative easing.

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October 08, 2010 at 11:28 am

The point is that the stability that home ownership implies for social order and the jobs created by maintaining each home is reason enough to push these homes into private ownership. So whether it takes negating the tax incentives that banks may use to avoid actively selling these homes, or some other method; we should keep the conversation alive. A truly bad notion is not having any at all.

Mike S
October 05, 2010 at 3:09 pm

Why should the federal government keep the housing market over-inflated? If homes aren't selling, it's because the asking price is too high. The only thing the government is doing by keeping the bubble inflated is keeping renters from buying affordable homes.

Holden Lewis
September 29, 2010 at 10:52 am

Well, yeah, in theory. But let me put it this way. The house across the street from me is in foreclosure and has sat empty for four months. The Fed couldn't do a worse job of maintenance and upkeep than whoever is supposed to be doing that now.

A lot of people hold an article of faith that says that government can't do anything right. I disagree with that, because my streets are paved and the fire department would arrive promptly if I called. But I've had plenty of run-ins with the private sector. Ask anyone who has flown lately, or dealt with the cable company, or wanted to get an explanation of a medical bill, or waited all day, in vain, for a repairman to show up. And the bank that foreclosed on my neighbor doesn't have any concern for my neighborhood.

Ben Brugmans
September 28, 2010 at 10:21 pm

The mere thought of the fed BUYING houses begs the question of maintenance. Empty houses deteriorate quickly. Leave alone vandalism, lawns and municipal taxes. Ownership implies more upkeep than mere legal posession.
It is a really, really bad notion.