Federal Reserve Chairman Ben Bernanke spoke at the Economic Club of New York on Oct. 15, 2008 and praised the Treasury and Congress for moving to restore confidence in US financial markets. (full speech) However, he warned the process would take time, since the housing crisis continued to be worrisome. He said:
Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away. Economic activity had been decelerating even before the recent intensification of the crisis. The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets, and we have seen marked slowdowns in consumer spending, business investment, and the labor market. Credit markets will take some time to unfreeze.
Dean Glenn Hubbard, who is also chairman of the Economic Club, responded along with Harvard economist Martin Feldstein, to Bernanke’s speech in an interview with Bloomberg TV. Hubbard said: (watch video)
What is important is ... to stop falling house prices. There are ways to do that and variety of proposals, but they all center on getting the mortgage rate back to where it would be in a well-functioning credit market. The second would be to clarify the capital injections, and how the Fed and the Treasury will resolve troubled institutions so the market knows and private capital knows. And the third would be for the Fed to be very aggressive in guaranteeing interbank lending and providing for commercial paper. … We will have 10 to 15 % further house price decline likely, absent policy action, and that will hurt consumer spending and hurt the job market and, of course, the balance sheets of commercial institutions.
Both Dean Hubbard and Senior Vice Dean Chris Mayer (and Feldstein as well) have been vociferous in asking for policy action on housing. In the Wall Street Journal ("No Quick Fix for Housing Prices", Oct. 14), Mayer called for government to "push mortgage rates down to 5.25% in order to spur demand."
As I understand the new McCain plan, it would buy mortgages from the lenders (or servicers) and then refinance them into the FHA plan. ... A more modest proposal than that of Sen. McCain, which may balance costs and benefits more effectively, would follow the example of the successful Mexican "Punto Final" plan of 1999, which resulted in substantial debt write-downs very quickly and the resolution of much financial gridlock in that country.
The government would share losses borne by lenders from mortgage principal write-downs on a proportional basis. For example, taxpayers could absorb 20% of the write-down cost borne by lenders on any mortgage so long as it is agreed through a voluntary renegotiation between lenders and borrowers, and so long as doing so creates a sufficient write-down for borrowers to be able qualify for refinancing under the FHA facility.
What are your thoughts about solving the housing crisis? Please leave your comments.
Photo credit: Economic Club of New York