“Intervention can distort risks”
The WSJ has a round-up of Fed comments that it reported on the same day that the awful employment data were released. There is a whiff of complacency in the air — “Puritan Fed mode” — amid the expressed concerns:
“If current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy,” Fed governor Randall Kroszner told a San Francisco audience…
The Mortgage Bankers Association yesterday said a record number of American homes entered the foreclosure process in the second quarter as homeowners with adjustable-rate mortgages continued to fall behind on payments [18 states reported delinquencies of 19% or more - ed.]…
William Poole, president of the Federal Reserve Bank of St. Louis, said there is “no question” that recent market turmoil would worsen conditions in the U.S. housing market, but that the effect on the broader economy was less clear. “I think the probability of recession is higher than it used to be,” Mr. Poole said following a speech in London. He added that there is anecdotal evidence and also some formal data “suggesting there is a further leg down in the housing market.”
A reduction in household wealth, in part from slower home-equity withdrawals, “could pull down overall household spending,” Atlanta Fed President Dennis Lockhart said. Fed officials are watching economic data and anecdotal reports closely for signs of a shift, he said in a speech in Atlanta, adding, “So far, I have not seen hard or soft data that provide conclusive signs that housing problems are spilling over into the broad economy.”
Most of the U.S. economy “is doing reasonably well,” said Thomas Hoenig, president of the Kansas City Fed, suggesting that the housing-related problems haven’t spread. “We still have good export demand for our goods, which is helping our manufacturing and carrying it, so I don’t see that it has carried over at this point,” he said in an interview with PBS’s Nightly Business Report.
Officials continued to raise the “moral hazard” concern, indicating that they don’t want to be seen as rescuing investors who took excessive risks. Mr. Lockhart said policy “should enable natural market functioning,” though actions may be necessary to address concerns about financial-system stability as seen with last month’s liquidity crisis. “Market participants should expect and actually experience accountability for their decisions through natural market processes,” he said. “Intervention can distort risks and create incentives to take exaggerated investment positions.”
“Market participants should expect and actually experience accountability for their decisions through natural market processes…Intervention can distort risks and create incentives to take exaggerated investment positions.” As should have been clear since the time of Andrew Mellon, the Fed’s job is less to be a nanny than to ensure good monetary and credit policies in the overall interests of the US economy and citizens.