Transcript Alternative Policy Instruments X

1
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Recap of the housing crisis, and review of a
few subprime myths and facts
Quick look at the current state of the housing
markets
Review the macroeconomic backdrop to
housing
Primer on recent Federal Reserve actions
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The subprime population is too high risk, and should not
get mortgages
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Subprime mortgages are “exotic”: Option-ARMs, NegAms, IO, etc.—we should stay away from such predatory
products
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NO: In fact, VERY FEW of subprimes were this type of mortgage
Almost all were 2/28 or 3/27 ARMS
OK, but that’s why they defaulted—the ARM resets!
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Historical default rates for subprime about 2% in US
NO: Little or no evidence of any reset effect
(In fact, many reset to lower interest rates)
Securitization was a bad idea—Subprime MBS securities
all lost huge amounts, and were a dumb idea
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NO: In fact, losses on AAA “vanilla” MBS < 10%
8
5.0
Subprime ARM mortgages, US
7
NH subprime ARMs (4-qtr. Avg.)
4.5
VT Subprime ARMs (4-qtr. Avg.)
6
Conventional Prime mortgages, US (right scale)
4.0
3.5
5
4
3
3.0
Normal times:
subprime rates are
higher, but
manageable
2
1
2.5
Crisis times:
Everyone is
in a mess
2.0
1.5
1.0
0.5
0.0
0
1998:Q1 2000:Q1 2002:Q1 2004:Q1 2006:Q1 2008:Q1 2010:Q1 2012:Q1
Source: Mortgage Bankers Association, Haver Analytics
•
•
•
Source: Foote and Willen (2012)
No link between reset
date and default
Defaults increased in
2007/8—because house
prices fell,
unemployment rose
Thus the rapid increase
in prime defaults as well
(not shown)
Losses much worse on CDOs
Losses less than 10% on AAA
Why: Credit protection worked
Private label RMBS
Foote and Willen (2012)
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Better—permits are rising, inventories are lean
Source: Census Bureau, Haver Analytics
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Prices are flattening or turning up modestly
Source: FHFA, Core Logic, Haver Analytics
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Vacancies have improved nationwide (less so
in VT, NH)
Still a lot of REO/property held off the market
Source: Census Bureau, Haver Analytics
18
Measures of Labor Market Slack
64
63
16
62
14
61
12
60
10
59
8
6
4
58
"U-6" (UR plus discouraged, marginallyattached, part-time for economic reasons)
Civilian unemp. Rate
Employment-population ratio (right scale)
2007:Jan 2007:Sep 2008:May 2009:Jan 2009:Sep 2010:May 2011:Jan 2011:Sep 2012:May
Source: Bureau of Labor Statistics, Haver Analytics
57
56
55
Recession ends
Source: Bureau of Labor Statistics, Haver Analytics
Recession ends
Source: Bureau of Labor Statistics, Haver Analytics
Source: Bureau of Labor Statistics, Haver Analytics
1.5
Percentage points
1
Capital equipment: Support
Cap. Eqpt.
Avg. of capex
1
0.8
0.6
S&L government: Drag
S&L govt.
Avg. of S&L
0.4
0.5
0.2
0
0
-0.2
-0.4
-0.5
-0.6
-0.8
-1
0 1 2 3 4 5 6 7 8 9 10111213
Quarters after recession trough
Source: Bureau of Economic Analysis, Haver Analytics
-1
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quarters after recession trough
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Consumer spending has been fair to
middling, given overall strength
And you know about housing!
Source: Bureau of Economic Analysis, Haver Analytics
15
Consumer spending is
picking up
90
85
10
66000
Business spending is slowing
65000
0.5
64000
80
63000
5
75
70
62000
59000
Consumer sentiment
(Michigan)
Sentiment (expected
conditions)
-10
2012:Apr
2012:Jul
65
60
2012:Oct
-0.5
60000
Retail sales, 3-mo. Growth
-5
0
61000
0
1
58000
57000
Core shipments
-1
Core orders
IP, 3-mo. avg. growth (right)
2012:Apr
2012:Jul
Source: Census Bureau, Michigan Survey Research Center, Federal Reserve Board, Haver Analytics
2012:Oct
-1.5
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Household wealth has improved a bit
(housing values, stock market)
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The “fiscal cliff” matters less to households?
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But it matters to businesses
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The global slowdown affects exportdependent businesses, consumers less so
Source: Bureau of Economic Analysis, Haver Analytics
“Fiscal Cliff” risks
Category
Magnitude
“Bush Tax Cuts” (income, estate,
AMT)
$221B
Payroll Tax cut expiration
$95B
Sequestration spending cuts
$65B
Expiration of unemp. benefits
$26B
Other changes (war drawdown,
discretionary spending cuts,
deprec. allowance)
$303B
TOTAL
$710B=4.6%
of GDP
Overall effect on GDP growth
~2.5 pctg.
points
Source: Congressional Budget Office, author’s
calculations
Source: Wall Street Journal, Haver Analytics
Congressionally-mandated goals
(Dual Mandate)
Price stability
(low and stable
inflation)
Long-term
interest rates,
stock prices,
exchange rate
Maximum
sustainable
employment
Primary policy instrument
Federal Funds rate
(overnight bank
rate)
X
Alternative Policy Instruments
QE
“Forward
Guidance”
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We buy longterm assets
Removes them
from circulation in
private markets
 But private agents
still want them
 So they’re willing
to accept them for
a lower yield
Private Markets’
Securities
Fed’s Securities

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Bottom line: we’re
trying to reduce
long-term rates
4
Interest Rates
3.5
3
2.5
2
1.5
Jan
Feb
Mar
Apr
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The recovery has been frustratingly slow
Our tools to address weakness are somewhat
limited
But we are doing what we can
Recently, we have paid particular attention to
employment shortfalls
Not because we don’t care about inflation
 But because the gap between the goal for
employment is so large
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