First, do no harm. That is at the top of the oath that every physician takes. But many pediatricians will prescribe antibiotics for a young child with a cold mainly to mollify the parents.
No matter that antibiotics can’t do anything for a viral infection. The parents want something, anything to be done to make their tot feel better (and let them get some sleep),so many pediatricians find themselves writing the scrip, which mainly was the path of least resistance.
Central bankers have followed the same position. The Federal Reserve Wednesday reaffirmed its plan to continue to pump liquidity in the financial system through securities purchases until the unemployment rate fell to levels considered normal. If normal is not the equivalent of 98.6 degrees farenheit, then it at least until the fever has broken.
There was a time when the Fed demurred that it could control much of anything, even money, which after all was something in its field of purview. After allegedly trying to target the growth of the money supply in the early 1980s, the Fed determined it couldn’t even define what constituted money in the then brave new world of money-market funds.
The Fed couldn’t manipulate things, as in the classic Al Hirschfeld illustration of “My Fair Lady” with George Bernard Shaw playing the puppeteer manipulating the character of Henry Higgins played by Rex Harrison, who in turn manipulated Eliza Doolittle played by Julie Andrews. So Paul Volcker, then the Fed chairman, gave up on targeting the money supply and sought to aim to keep inflation at bay.
As with pornography and the Supreme Court, the Fed may not have been able to define inflationary easy money, but it could recognize it. And a Princeton economics professor named Ben Bernanke put forth the proposition that, central banks may not know how to target so-called intermediate variables such as money supply with precision, they should get to the bottom line and target inflation. .
While inflation is everywhere and at all time a monetary phenomenon, as Milton Friedman taught, unemployment is the product of many economic forces. It is not simply the inverse of the price level, as the so-called Phillips Curve would posit. A little inflation won’t lower unemployment permanently as wages rise to meet higher prices and allow workers to catch up, leaving them on a proverbial treadmill.
Yet the policy-setting Federal Open Market Committee Wednesday reaffirmed its policy to continue to purchase $40 billion a month in mortgage-backed securities from federal agencies such as Fannie Mae and Freddie Mac, continue to swap $45 billion of long-term Treasury securities for shorter-term holdings, and to keep its key short-term policy interest rate near zero through mid-2015, where it’s been since late 2008 in the depths of the financial crisis.
Somehow, three decades ago the Fed said the money supply was beyond its grasp; now it says it will target the unemployment rate. As if the decision to hire hinged on the cost or the availability of credit when businesses show little inclination to borrow. Cheap money can’t overcome the hurdles of uncertainties about taxes and regulations, which entrepreneurs readily say are their main concerns.
The Fed’s efforts are mainly evident in the housing market, not surprisingly since it is the sector the that caused the economy’s near-collapse and is the central bank’s focus as the most credit-sensitive part of the economy. Wednesday, the Commerce Department reported new-home sales rose again, to a seasonally adjusted annual rate of 389,000 units, some 27% higher than a year ago.
Housing will provide a positive for third-quarter gross domestic product growth, due to be reported Friday, instead of being a drain. Whether there is a durable recovery is open to question.
Housing analysts point to the backlog of foreclosures that finally is being cleared, which opens up the prospect of more home building, and with it jobs for builders and suppliers. And it can’t be denied the foreclosed properties being snapped up by investors and opportunistic home buyers invariably need fixing up, which has been a boon for the likes of Home Depot (ticker: HD) and Lowe’s (LOW.)
What’s not mentioned are the 10.2 million houses that are worth still less than the mortgages attached to them, according to Zillow.com’s reckoning at the end of the third quarter. While that’s down from over 11 million a year earlier, it still represents a lot of potential supply of homes that are likely to hit the market.
These are houses owned by Americans who did the right thing, meeting their mortgage obligations even though it economically disadvantageous. Moreover, they couldn’t sell their house without writing a check for the difference between the house’s price and the loan balance.
Higher property prices are closing that gap. While distressed sales are down, I see more homes up for sale now that market conditions have improved by owners who didn’t have to sell into a bear market. As any market technician will tell you, there can be overhead supply for sale once prices recover from a plunge. Amateur stock punters will wait until they get even to sell out; so it is with many homeowners.
For homeowners who got in near the top in the middle of the last decade, any chance to walk away will likely be taken. Remember, they had relatively little skin in the game given the tiny down payments required then.
Meanwhile, homeowners who bought years ago and are sitting on big profits and relatively limited mortgages — such as Baby Boomers looking to retire — may well see now as a propitious time, in traders’ parlance, to hit the bid (to accept the price offered by a prospective buyer.)
The Fed’s game plan appears to be to pump up the asset markets, both stocks and housing, in order to bring down unemployment. Whether that pays off remains to be seen.