Joe Gagnon On The Failure of Refinancing Policy

A lot's been written on the Internet about the failure of the HAMP program to provide relief to many families with underwater mortgages, but it's never been clear to me the extent to which these housing problems have been a real cause of economy-wide pain rather than simply a result of weak growth. But Mike Konczal reminds me that at the Roosevelt Institute conference on the Future of the Fed that I attended on Wednesday, Joe Gagnon made the case that non-functioning housing policy undermined the efficacy of quantitative easing:

[O]ne of the biggest goals of QEI was to push down the mortgage rate to spark a refinancing boom to encourage households and enable households to reduce their expenditures and repair their balance sheets and be able to spend again. That worked not quite as well as we hoped because the administration's program for getting underwater borrowers to borrow didn't work and I think that's a true disaster that has no excuse. I have nothing but incredible, there's just, the blame the administration on not doing this is just incredible. This could have been a huge success. We got the lowest 30-year mortgage rates in history and we couldn't take advantage of them to the extent that we could. We got about a trillion dollars in refinancing when we should have gotten two or three trillion dollars in refinancing.

Gagnon's whole talk on the subject of QEI and QEII is worth your time:

Joseph Gagnon, Future of the Fed from Roosevelt Institute on Vimeo.

But to turn this critique back on Gagnon and his then-colleagues at the Fed, I think the partial dependence of quantitative easing on developing a better housing policy fix illustrates some of the problems with trying to conduct monetary policy via such an indirect route. After all, suppose we'd just done "helicopter drops" of money* instead of printing money and using the money to buy government debt to drive down interest rates in hopes that, among other things, people would refinance their loans. Well, if you're an underwater homeowner then having a helicopter drop some cash on you helps. And if you're a homeowner who's not underwater it helps. And if you're a renter who's eager to buy, then it helps. And if you're a renter who has no intention of buying, it also helps. If you increase the quantity of dollars that each American household possesses, then the nominal value of expenditures will increase and idle resources will tend to be mobilized.

You can also achieve this through more indirect means (and certainly the Fed's programs accomplished a lot) but the more indirect your methods the more junctures at which it's possible for things to go wrong. "Print more money, hand the extra money to people, and keep doing it until you're near full employment" sounds laughably crude and obvious, but there's every reason to believe it would work.

* Roughly equivalently, and more directly targeted at the labor market you could temporarily suspend payroll taxes and have the Fed print money and give it to the Social Security Administration to fill the gap in tax collection.