Monday, October 24, 2011

From Prof. DeLong: What Prof. Summers says we should be doing now: Fixing US Housing economic sector

What should we be paying attention to right now? What should we be doing right now? High on the list, even from a global perspective, is probably fixing the US housing economic sector of the global economy. Here is Prof. Summers, being what I think is a Bostrom Agent (see my Neurotic Manifesto for its definition):

The question now is what should be done…. [T]he FHFA… has taken a narrow view of the public interest… has not acted to ensure the GSEs stabilise the US housing market, and taken no account that the narrow financial interest of the GSEs depends on a national housing recovery…. A better approach would involve several changes in policy.

First… credit standards for those seeking to buy homes [now] are too high and rigorous….

Second… those on GSE-guaranteed mortgages should… be able to take advantage of lower rates….

Third, stabilising the housing market will require doing something about the large and growing inventory of foreclosed properties….

Fourth… [while] the Obama administration’s home affordability modification programme has been criticised for overly restrictive eligibility criteria, the reality is that a large fraction of those receiving assistance have ultimately been unable to meet even their reduced obligations…. Surely there is a strong case for experimentation with principal reduction strategies at the local level. The GSEs should be required to drop their posture of opposition to experimentation and move to a more constructive position.

Fifth… allowing negotiation over the past to dominate present policy creates overhangs of uncertainty that impose huge costs on the financial system and inhibits lending….

With a constructive approach by independent regulators, far better policies could be in place six months from now. The anticipation of a change to supportive policies could change the tone of the market even sooner. There is nothing else on the feasible political horizon that can make as large a difference in driving American economic recovery.

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