Bernanke Could Use a Clue
By Arnold Kling
Lots of big names at a Berkeley symposium on housing finance, including Ben Bernanke. Reportedly, Bernanke focused on the need to rework the government guarantee of mortgage securities.
I really believe that is wrong. Moreover, he knows less about it than I do, even though he has tremendous power and influence and I have essentially none. But we do not need mortgage securitization at all to have a mortgage market. Given how badly securitization has turned out, we would have been better off without it. Going forward, the cost of reviving that market seems to me to be pretty high. The benefits, relative to just letting banks do the lending the old-fashioned (1960’s) way, are miniscule. Symposium papers included Dwight Jaffee:
After all, subprime loans appear to represent no more than 4 percent of all US investment securities, and the aggregate loss rate on subprime loans in the end may not exceed 25 percent.9 Using these numbers, a “representative” `US investment portfolio would suffer a one-time loss of 1.0 percent (= 0.04 x 0.25) as a result of its subprime investment. This is certainly not a number that would be expected to bring the largest US financial firms to their knees
Well, sure if all the subprime mortgages were evenly spread across the entire universe of financial institutions, they would all still be solvent. The rest of the paper is equally asinine, if you ask me.
Edward Leamer says that housing is highly procyclical, so that the Fed should use housing starts as an economic indicator. When housing starts are low, you reduce interest rates, and when they are high, you increase interest rates, over and beyond what you would do based on the inflation and unemployment rates. My guess is that this has a real-world relevance on the order of rounding error. Brad DeLong’s take:
That is a question. I know that Ed Leamer is very smart and very brave to be a macroeconomic time-series econometrician. But it is not clear what macroeconomic time-series econometricians have to offer here. I have no answer.
Later, in a discussion of a paper by Shiller, DeLong writes,
Greenspanism is the doctrine that the Federal Reserve must make sure that consumer-price inflation stays low and that expectations of future consumer-price inflation stay low, but that otherwise should let the macroeconomy govern itself and if exuberance leads to an episode in which the economy is saying laissez les bon temps roulez, then laissez les bon temps roulez.
No Greenspan-hatred here. Move along. I mean, come on. The absolute consensus among academics was exactly what Brad calls Greenspanism. If you had offered a petition in 2005 saying, “The Fed should raise interest rates when inflation is low, as long as there is somebody, somewhere, crying bubble,” who would have signed?
He says, in effect, that everyone would sign that petition now. Well, count me out. All I can say is that after the fact, I sure wish someone had done something differently about the mortgage crisis. But at the time, nobody could connect all the dots. What if Dwight Jaffee had been right, that this should have been just a minor blip?
Christopher Mayer and R. Glenn Hubbard make the point that house prices appreciated in many markets outside the U.S. where there was direct lending. This argues against the view that securitization played a big role in the housing bubble in the U.S. They want to attribute the bubble mostly to declining interest rates, with some irrational exuberance thrown in, particularly at the end. They point out that mortgage rates now are unusually high, and they think that bringing them down by a percentage point would help moderate the decline in house prices. Perhaps, but I’m tired of policies that try to levitate house prices. And I’m tired of government trying to make sure that mortgage credit is cheap.
Shiller answers Jaffee’s question of how the subprime crisis blew up so many firms by point out that nobody knows who holds what. This creates a “lemons problem” among financial institutions (which ones are lemons?) and caused a “negative bubble in valuations of firms holding subprime securities.”
Shiller is one of those who thinks that the only thing wrong with derivative markets is that they are over-the-counter and therefore involve counterparty risk. He and I could have a debate about that, particularly when it comes do credit default swaps. Trading them on an organized exchange would be putting lipstick on that pig, if you ask me.
Most of the other speakers had no written materials (one paper came with a very serious “preliminary, do not quote” disclaimer, which is fine).