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October 1, 2012

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Links for 09-27-2012

Posted: 27 Sep 2012 12:06 AM PDT

Should Home-Ownership be Discouraged?

Posted: 26 Sep 2012 07:37 PM PDT

Richard Green, in a debate at The Economist on home ownership:

The opposition's closing remarks Sep 26th 2012, by Richard K. Green: In his comments, Ed Glaeser makes a point that I wholeheartedly agree with: the American system of housing subsidies makes little sense. The largest housing subsidy, the mortgage interest deduction,... does little to help those at the margin of home-owning...
Nevertheless, I think Mr Glaeser sells his own study short when he argues that the civic connections established through home-owning are not very important. Home-owning can help countries overcome legacies in which property owners have exploited property users—legacies that include the hacienda system in Latin America and the Philippines, and sharecropping and company towns in America. There are important links between ownership, personal independence and the sense of control, as well as the ability to be socially mobile.
One could argue that we in America engaged in an experiment in discouraging home-ownership for ... minorities in general and African-Americans in particular. For many years, real-estate agents and lenders in America discriminated against minorities who tried to purchase houses, and American housing finance policy discriminated against African-American and central city neighborhoods. ... Hence the inability of African-Americans to own homes was very much the result of policies that targeted African-Americans.
One of the upshots of this is that the home-ownership rate among African Americans, at 46%, is considerably lower than it is for white Americans, at 71%. Controls for wealth, income and demographics are not sufficient to explain the gap. And ... African-Americans continue to get loans at less favorable terms than others.
But does any of this matter? ...—home equity explains the likelihood that children will complete college better than any other type of asset... It seems that a lack of access to owner-occupied housing has prevented African-Americans' access to a college degree. ... Educational attainment is crucial to social mobility. ... This is both economically and socially destructive.

The entire debate is here.

Fed Watch: Plosser Opposes the 1933-37 Expansion

Posted: 26 Sep 2012 09:24 AM PDT

Tim Duy:

Plosser Opposes the 1933-37 Expansion, by Tim Duy: Philadelphia Federal Reserve Charles Plosser spoke yesterday, reiterating his opposition to QE and his expectation that it will have no impact on growth. I don't think any of that should have been a surprise. What caught my attention was this:

Once the recovery takes off, long rates will begin to rise and banks will begin lending the large volume of excess reserves sitting in their accounts at the Fed. This loan growth can be quite rapid, as was true after the banking crisis in the 1930s, and there is some risk that the Fed will need to withdraw accommodation very aggressively in order to contain inflation.

I am somewhat concerned that a Federal Reserve official would use loan growth in the 1930s as an example of what could go wrong with quantitative easing. It should be seen as an example of what could go right.

Presumably, Plosser is talking about something like this graph:

Plosser1

This is a problem because...why? The inflation, that's right:

Plosser3

Yes, there was inflation after 1933. And no, this wasn't a bad thing. The inflation, as well as the loan growth were part of the recovery. They were features, not bugs, of easier policy. And even by 1937, both the price level and loans were below pre-recession peaks. Yet, policy turned prematurely tighter, tipping the US economy back into recession and deflation.
Bottom Line: Fed hawks obsess with the issue of having to unwind quantitative easing when the economy improves. We should be so lucky. Shouldn't we wait until we see some hope that rates can sustain themselves above at least 3% before we worry about this? Somehow the hawks fail to understand that policy is always reversed in the next pahse of the business cycle. Simply put, if we need to unwind quantitative easing, the policy was indeed effective. Plosser takes the wrong lesson away from rapid loan growth in the 1930s. The lesson is not that we should fear recovery. The real lesson was to avoid premature tightening of policy.

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