Fed’s push on housing crosses a line, critics say

February 21, 2012

Senior Federal Reserve officials are injecting themselves into a noisy debate over how to solve the housing crisis, drawing criticism from some lawmakers who say the Fed has no business straying from its traditional role as the U.S. central bank.

Amid complaints that the Fed has encroached on Congress’s territory, Chairman Ben S. Bernanke has tried to allay concerns on Capitol Hill over the past few weeks, in the latest flap in a broader debate about the Fed’s proper role in the economy.

That discussion began after the Fed started taking un­or­tho­dox measures in 2008 to address the financial crisis, including several rounds of massive bond purchases and steps to shore up lending markets. All the Republican presidential candidates have criticized Bernanke on various counts, saying he has printed too much money, damaged the value of the dollar and carried out programs that simply haven’t worked.

In Washington, the reaction to the Fed’s efforts to bring down unemployment has divided along partisan lines. Democrats say the steps are necessary, but Republicans say they risk sparking inflation and undermining the currency.

The latest commotion follows the Fed’s release last month of a report analyzing housing policy, which central bank officials say is closely related to their efforts to reinvigorate the economy. The report suggested that additional federal efforts to help homeowners could be worthwhile, even at taxpayer expense.

Democrats have seized on the “white paper” as ammunition in arguing for billions of dollars in new federal relief for beleaguered borrowers. Some Republicans have accused the Fed, which generally avoids addressing policy questions before Congress, of potentially compromising the central bank’s independence.

“It appears the Fed may have overstepped their bounds in recommending fiscal policy actions,” said Michael Feroli, chief U.S. economist at J.P. Morgan Chase. “It does get a little bit into dangerous territory.”

After Rep. Scott Garrett (R-N.J.) complained this month that the Fed had crossed a line, Bernanke said publicly that he was sorry if the lawmaker thought that the white paper intruded on a congressional debate. And after Sen. Orrin G. Hatch (R-Utah) released a letter he sent to the Fed, warning it “to refrain from providing any hint of activism,” Bernanke called him to explain the central bank’s actions.

Some Fed officials, in particular New York Fed chief William Dudley, have advocated a variety of new efforts to aid homeowners. Many of the white paper’s ideas to help the housing market echo Obama administration proposals, such as helping homeowners refinance into more affordable mortgages and selling foreclosed buildings for use as rental properties.

Speaking at a national conference of home builders this month, Bernanke explained that the Fed has a keen interest in the health of the housing and mortgage markets because they are related to the central bank’s main missions of supporting the economy, regulating banks and protecting consumers.

“The economic recovery has been disappointing in part because U.S. housing markets remain out of balance,” he said. “For these reasons, and because the troubled housing market depresses construction activity and employment, we need to continue to develop and implement policies that will help the housing sector get back on its feet.”

Bernanke, who is asked frequently on Capitol Hill for his views, has said the Fed has not tried to advocate particular policies. He has said that he was seeking in the white paper to provide a balanced analysis of steps that might improve the health of the housing market — improvement that is vital if Fed efforts to boost the economy are to succeed.

But the release of the report, which was written by nonpartisan staff members, drew concern from some of Bernanke’s Fed colleagues.

“We have to be really careful because of our special independence,” Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said last month on CNBC. “And when the central bank strays into fiscal policy, it gets itself entangled in politics, and that can threaten our independence.”

A history of speaking out

More than perhaps any other federal agency, the Fed was established to operate independently of both the president and Congress so that it would be free of political pressures when judging what’s best for the economy.

While Bernanke — who was first appointed by President George W. Bush and reappointed by President Obama — has been more outspoken recently on housing policy, it’s by no means the first time that Fed officials have offered their opinions on matters outside their central responsibility of setting interest rates. Former Fed chairman Alan Greenspan routinely expressed his views on issues before Congress, such as taxes, whether they touched on the central bank or not.

Fed officials have increasingly spoken out about housing policy in part as they’ve become frustrated with the limited impact of their efforts to support the economy. The Fed has kept interest rates near zero and pumped money into the economy by buying more than a trillion dollars’ worth of mortgage-related securities. These policies should be making it easier for people to buy homes, launching a virtuous cycle of rising housing prices and fewer foreclosures.

But the housing market has not rebounded. In part, this is because of the policies of the government-owned mortgage giants, Fannie Mae and Freddie Mac, according to some Fed officials and outside economists. The two companies have been setting tight credit standards for new loans and charging relatively high fees, making it difficult for many homeowners to refinance their mortgages at lower rates.

Also impeding the recovery are the large number of foreclosed properties on the market, including many owned by Fannie and Freddie, and the onerous debts of millions of borrowers who owe more than their properties are worth and thus can’t refinance or sell them.

In the white paper, the Fed suggests that Fannie and Freddie — technically called “government-sponsored enterprises,” or GSEs — should be more open to taking short-term losses to help homeowners. “Some actions,” the paper said, “that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”

‘Deeply counterproductive’

But the Fed’s view of Fannie and Freddie is not a universal one. Kevin Warsh, a former Fed governor who helped Bernanke fashion the emergency response to the financial crisis, said late last month that “the government-sponsored housing entities remain sources of vulnerability to the U.S. economy, and repeated ad-hoc attempts to push Fannie Mae and Freddie Mac to take greater risks at taxpayer expense is deeply counterproductive.”

And Republicans in Congress are questioning whether it is appropriate for the Fed to endorse policies that would cause taxpayer losses.

“The Fed needs to work toward greater clarity on the distinction between monetary and fiscal policy and stay within the bounds of what constitutes monetary policy actions and advocacy,” Hatch said through a spokeswoman.

Meanwhile, at a congressional hearing this month, Garrett said that “the Congress has a lot of interest in monetary policy. I guess the comparable would be for us to do a House resolution with regard to monetary policy. Is this an invitation now to Congress that we should be issuing resolutions to what the monetary policy [is] that the Fed should be doing?”

“It was not the intent of that white paper to provide a set of recommendations,” Bernanke replied. “I know you’re skeptical, but we are trying very hard to avoid encroaching on Congress’s fiscal responsibilities. . . . I apologize if it was misinterpreted.”

Zachary A. Goldfarb is a staff writer covering the White House, focusing on President Obama’s economic, financial and fiscal policy.
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