Wednesday, March 19, 2008

A positive expected value bet

Fannie Mae and Freddie Mac's regulator is loosening their capital requirements. This is, I think, the correct call. It is possible that Fannie and Freddie can stablize mortgage credit markets by refinancing loans--particularly Jumbos--and mitigate house price declines in coastal markets (I don't think Florida and Inland California can be helped much).

I am not saying this will work, but if OFHEO had done nothing, we could be sure of a taxpayer bailout. At worst, the reduction in capital requirements will leave taxpayers no worse off. At best, the reduction could make everyone better off. This means that the expected impact of the policy decision is positive.

That said, Fannie and Freddie should now have their feet held to the fire about meeting their mission of liquidity provision.

3 comments:

Anonymous said...

Prof. Green,

Do you have any opinion regarding the discontinuance of M3 reporting by the Fed?

It seems that if we want to get a handle on inflation going forward, we should be looking at the biggest possible picture of the money supply.

Richard K. Green said...

The Fed said that it didn't add much in the way of information, and was costly to collect. I am not a monetary economist, though, so others more expert than I may have views on this.

Anonymous said...

Voters lost confidence in the dollar as a long term store of value, so they switched to homes as a store of value instead. Political pressure is exerted to maintain this new store of value. In some areas, political pressure is exerted to steadily increase the real value of the deferred consumption stored in this form.

It would have been less costly to maintain, if voters had decided to store value in the form of gold and jewelry, like in other nations where citizens lost confidence in the local fiat currency. Gold was probably not trusted though, since it was illegal for voters to store wealth in this form for so many decades.

Interesting phenomenon. I wonder how long voters in selected areas can keep the real value of their chosen storage medium increasing, at the cost of reducing the standard of living in other parts of the country/world?