Thursday, November 26, 2015

Why this Fed stimulus is different

Housing history makes Fed skeptic Dick Bove' a believer

Why this Fed stimulus is different


Federal Reserve boss Ben Bernanke's first two "quantitative easing" programs, designed to stimulate loans and business expansion by forcing interest rates still lower, served merely "to print money to buy government securities" instead, writes veteran bank analyst Richard X. Bove'

By contrast, Bernanke's "QE3" takes "a totally different approach" -- investing $2 billion a day or more "until the economy revives" in mortgage-backed securities. "Let me shout, the Fed is buying mortgage paper to stimulate housing," and it "will work," writes Bove'. "Follow the dollars." 

The Fed has moved backwards into the future, Bove' writes in a report to clients of Rochdale Securities. Until about 1970, the government controlled (corrected) Fannie Mae and Congress would "appropriate additional funds" in recessions so it could "buy more home loans" and stimulate "recovery in housing that would lead the economy out of the recession."

That ended with the Nixon-era reaction to the 1960s urban riots. The Emergency Home Finance Act of 1970 created or resulted in the creation of Freddie Mac, Ginnie Mae, private mortgage insurance, and especially the mortgage-backed securities market -- the whole independent (but government-backed) modern housing finance machine that separated housing growth from the government's "counter-cyclical" policies. The result was the housing boom and bubble of the 1980s-90s-2000s up until the collapse of 2008-09.

But the financial collapse, the foreclosure explosion, the Dodd-Frank bank restrictions, the tougher approach to weak loans by federal bank examiners, the lawsuits over sloppy automated loans and foreclosures, and the international Basel 3 capital limits have now reduced the home loan industry to its pre-1970 prostration.

Plus the government now runs Fannie Mae again (also Freddie Mac). "This means that it is now possible to adopt the techniques that were so successful prior to 1970" to "stimulate" housing, Bove adds. "This stimulus should re-awaken housing" and "the economy itself."

Will this work? "It would be nice," but consumers are still staggering with student debt and other obligations, notes Carolin Schellhorn, who teaches finance at St. Joseph's University. "Low mortgage rates help," but low incomes and high taxes will still squeeze homebuying. "The Fed is doing this because there is nothing else they can possibly try," but the real fix lies with Congress, which ought to focus on shifting tax subsidies and expenditures toward "wiser investments in infrastructure" that will stimulate and improve the economy, Schellhorn adds.

So it may be some time before buyers respond to all that money flooding the mortgage system. "You are right, the market must broaden. But it will, as the FRB pushes $2 to $3 billion in every day," Bove told me.

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About this blog

PhillyDeals posts interviews, drafts and updates that Joseph N. DiStefano writes alongside his Sunday and Monday columns and ongoing articles about Philadelphia-area business.

DiStefano studied economics, history and a little engineering at Penn. He taught writing and research at St. Joe’s. He has written for the Inquirer since 1989, except when he left a few times to work at Bloomberg and elsewhere. He wrote the book Comcasted, and raised six kids with his wife, who is a saint.

Reach Joseph N. at, 215.854.5194, @PhillyJoeD. Read his blog posts at and his Inquirer columns at Bloomberg posts his items at NH BLG_PHILLYDEAL.

Reach Joseph at or 215 854 5194.

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