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Although he didn’t get the nomination to replace Greenspan, Columbia’s Glenn Hubbard often comments on what he believes is the best path for policymakers to take. Yesterday Mr. Hubbard was at it again, offering a brief commentary on the Nightly Business Report:
“Policymakers should take action to blunt expected future declines in house prices…Consensus forecasts predict additional house price declines of 15 percent over the next 18 months. If we could lower mortgage interest rates by one percentage point, we could blunt this decline. And we can accomplish this change without costly new subsidies.”
Hubbard has devised a new bailout plan to stop housing prices from falling that won’t cost that much - wonderful!. Unfortunately this may not the case:
“…Financing mechanisms are available for the government to lower current borrowing costs for Fannie Mae and Freddie Mac and lower mortgage rates and raise house prices.” [bolds added]
Financing mechanisms are available to lower borrowing costs for Fannie and Freddie? Isn’t this akin to saying the government can lend money to itself more cheaply? Granted, it wouldn’t take an entirely ‘new’ bailout scheme to enact this type of plan, but isn’t added taxpayer exposure to the already bailed out Freddie and Fannie potentially very ‘costly’ Mr. Hubbard?
As for Hubbard’s assumption that lower mortgage rates raise house prices (recent activity in the U.S. housing market would suggest otherwise), in October Hubbard said “The price of a home is partially dependent on the mortgage rate” and “Rising mortgage spreads and down-payment requirements are what's still driving down housing prices.” In other words, Hubbard believes that lowering mortgage rates/spreads and loosening down-payment requirements could help ‘blunt’ the decline in housing prices. Also from October, Hubbard said that government endorsed mortgages “would be backed by houses and the verified ability to repay the debt by millions of Americans”, and that “for borrowers with lower credit scores, the mortgage rate would be greater [than Hubbard’s prescribed rate].” Apparently since these details infringed upon the optimistic noise Hubbard wanted to espouse on NBR they were not mentioned.
Suffice to say, Hubbard is reticent to acknowledge that falling mortgage rates are not a panacea. He is also myopically ignoring common sense when he says that his “plan could offer a $100 billion annual stimulus.” Where in the world did Hubbard pull this $100 billion figure from anyway? The answer, again, may come from his comments made back in October:
“So if home prices increased 10% above where they would have been without government intervention, we estimate consumers will have an additional $100 billion annually to spend.”
Remember, Mr. Hubbard is a well respected professor that almost became Chairman of Federal Reserve, not a crackpot. If you ignore the costs of a housing bailout consumers could have an $100 billion to spend if housing prices increase by 10%? Baffling, to say the least.
There are real costs when trying to stop housing prices from falling Mr. Hubbard, and these costs are already threatening to build: Yesterday Fannie Mae reported a $29 billion loss for 3Q08 and warned that the government’s $100 billion lifeline may not be enough, and Freddie Mac is expected to report terrible results later this week. In other words, while Hubbard’s plan to further utilize the Fannie and Freddie bailout conduit is plausible but not without costs, financial losses lead to the creeping possibility that more taxpayer funds will be required to simply keep these conduits solvent in the future. Imagine Hubbard as a chef preparing his secret recipe, all the while unsure if his oven is about to blow-up.
November 10, 2008: http://www.pbs.org/nbr/site/onair/transcripts/081110c/
October 2, 2008: First, Let's Stabilize Home Prices Hubbard
BWillett@fallstreet.com
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