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Sunday, December 16, 2007

Mr. Free Market Says Government Should Help

Greenspan says the government should bail out struggling homeowners:

Greenspan Says He Favors a Government Bailout for Homeowners, by  Steve Matthews, Bloomberg: Former Federal Reserve Chairman Alan Greenspan said he favors spending U.S. government money to bail out mortgage borrowers who risk losing their homes because they can't make payments.

Greenspan, speaking on ABC's ''This Week'' program aired today, said cash bailouts, while creating a larger budget deficit, have the advantage of helping homeowners without distorting property prices or interest-rates on mortgages.

''Cash is available and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this,'' Greenspan said. ''It's far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it'll drag this process out indefinitely.''

Greenspan's suggested approach differs from that of Treasury Secretary Henry Paulson, who negotiated a freeze on the interest rates of some subprime mortgages without pledging any government money to help homeowners or banks.

The WSJ Economics blog has more. Greenspan is asked next if there needs to be a bias toward activism right now:

It depends what you mean by activism. If you mean doing something that works, absolutely. If you mean doing something just for the sake of perceptions, that’s very costly. I don’t know if [infusing cash] would work, but it would certainly help people — it would help their incomes; it would help their personal state, without affecting the structure of the way markets are behaving and the way adjustment process is going on. It’s very critical that this thing reach a selling climax — if I may put it in other words, exhaust itself. It’s only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony.

I don't understand how an infusion of cash to help struggling homeowners would leave the speed at which the housing market corrects unaffected. And maybe it shouldn't. The point of stabilization policy is to smooth business cycles, and it may be that smoothing the adjustment process over time, i.e. preventing a sudden drop through policy intervention, makes the bottom of the market higher higher than it was before. If so, then intervention does make the adjustment take longer, but it is not as severe. Greenspan also says "cash is available." From whom or from where? He's talking about creating a deficit through fiscal policy, so I'm guessing he means fiscal policy - broad based tax cuts in particular (though I've argued that increased spending works better than tax cuts for these problems) -  not money directly given directly and solely to struggling homeowners, but its hard to tell from what he says. Atrios also comments.

    Posted by on Sunday, December 16, 2007 at 10:59 AM in Economics, Financial System, Housing, Policy | Permalink  TrackBack (0)  Comments (27)

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