Federal Reserve Gov. Daniel Tarullo said he supports large-scale purchases of mortgage-backed securities to support the housing market.
Tarullo made his comments during a speech about unemployment, the labor market and the economy Thursday at Columbia University in New York.
"I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities, something the (Federal Open Market Committee) did in November 2008 and then in greater amounts beginning in March 2009 in order to provide more support to mortgage lending and housing markets," he said.
"Up until quite recently, the dominant metaphor one heard for the economy was that it was on its way to a healthy recovery but was hitting occasional 'soft patches'," he said. "This reading of the data always seemed to me quite optimistic. Now, I believe, nearly everyone has toned down their expectations. I think the better metaphor is of an economy slogging through the mud and occasionally hitting stretches of dry pavement, which may well have been associated with the peak effects of fiscal and monetary policy initiatives."
A key factor in this recession has been the high amount of debt — especially household debt — that accumulated before the financial crisis, Tarullo said. When the housing bubble burst, debt levels that looked manageable when home prices were rising suddenly appeared burdensome as house prices declined.
"There has been some progress in working off or writing down some forms of debt, such as credit card balances. But housing continues to hang like an albatross around the necks of homeowners and the economy as a whole, with millions of underwater mortgages, a staggering inventory of foreclosed homes, and depressed levels of sales."
Tarullo said neither monetary nor fiscal policy will be able to fill the whole aggregate demand shortfall quickly, but appropriate policies — including more monetary actions — could boost output and employment.
At the September FOMC meeting, the committee changed its reinvestment policy so that the proceeds of maturing agency securities will now be reinvested in new MBS. Since the change, spreads on lower-coupon MBS have narrowed, but they remain higher than they were early this year.
"A large-scale MBS purchase program has many of the benefits associated with purchases of longer-duration Treasury securities, such as inducing investors to shift to other assets, including bonds and equities. But it could also have more direct effects on the housing market. By increasing demand for MBS, such a program should reduce the effective yield on those MBS, which in turn should put downward pressure on mortgage rates. The aggregate demand effect should be felt not just in new home purchases, but also in the added purchasing power of existing homeowners who are able to refinance."
Refinancing proposals "that could sensibly and effectively be implemented" could help a MBS purchase program, he said.
"Needless to say, though, an MBS repurchase program will not cure all that ails the housing market, much less fill the whole aggregate demand shortfall," he said.
Still, such a program is worth consideration, Tarullo said.
"MBS purchases are worth considering as a monetary policy option precisely because they carry the promise of addressing the feature of the current aggregate demand shortfall that differs from typical recessions and recoveries."
Write to Kerry Curry.
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