One of the first principles doctors learn in medical school is primum non nocere — first, do no harm. The doctors of the economy should take heed. Current fiscal and monetary policies keep the patient sick.
Fiscal policy refers to the level of government spending and/or taxation rules set by Congress and the president. Monetary policy is primarily the interest rate objectives of the Federal Reserve.
In today’s markets, both policy programs hope to increase economic growth, but end up hindering the same. The harm is most evident in the housing industry.
Three years ago the federal government used taxpayer funds to bail out mortgage giants Fannie Mae and Freddie Mac. To date, more than $150 billion has been given to both firms, and the president now wants the federal government to do more under a new Federal Housing Administration refinance program.
In a recent radio address, the president called on the American public to "get on the phone, send an email, tweet" their congressional lawmakers in support of a new refinancing program. The proposal calls for $10 billion in new spending for the FHA so it can take on the risk of home loans with above-market interest rates.
The administration suggests this additional government spending be paid for with a tax on banks. The same banking market where interest rates are set will apparently pay the price for this policy.
Meanwhile, policymakers at the Federal Reserve are trying to do their part by keeping interest rates low on mortgages. Current monetary policy keeps short-term interest rates near zero and holds down the longer-term rates. Through what is called quantitative easing, the Fed is buying mortgage-related bonds, raising their prices and keeping mortgage interest rates at historic lows.
On the surface both fiscal and monetary policies support the housing market. It just doesn’t seem to be working. Housing prices remain low, and the industry is seeing little investment.
Single-family house prices, as tracked by the Standard & Poor’s Case-Shiller composite index, fell 0.7 percent from the previous month in the most recent report. According to this index, average home prices across the U.S. are at 2003 levels.
New private-housing building permits in the Treasure Valley averaged only 155 per month in 2011. While this is up from 144 in 2010, the rate of new home building is the lowest it’s been since the early 1990s. Further, the median house price in the valley is 37 percent below the 2006 peak, according to data from Intermountain Multiple Listing Service.
Given that the new refinance program requires new taxes, such fiscal policy loses its impact. When businesses and households see increased taxes, they save more and spend less. This behavior reduces demand for housing and bank-supported investment by builders.
On the monetary policy side, low interest rates hurt savers. The Fed wants more people to take out mortgages and buy new homes, but low interest rates on savings accounts make it nearly impossible to meet the required down payment.
Lenders aren’t willing to take much risk after one of the worst housing bubbles in history. Home buyers today need higher down payments but can’t save up these needed funds because their savings accounts earn too little interest. Again, since the FHA program will be funded by a tax on banks, the interest rate on bank savings accounts is likely to go down even further.
Something’s got to give. Economic policy doctors must look first to the potential harm of seemingly great ideas.
Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. Reach him at firstname.lastname@example.org.