Sunday, January 3, 2010

Paul Krugman: Fannie, Freddie, and Full Faith

Fannie and Freddie... [are] in the same business as the Fed these days.... [W]hat the Fed is doing when it engages in “quantitative easing” [is] expanding its balance sheet by buying unconventional assets... a broader provision of credit to the private sector by governmental or quasi-governmental agencies.

Why do this?

Part of what depressed the economy during the financial crisis was a widening spread between government debt and private borrowing costs--not just in things like the TED spread, but also in mortgage rates. This spread was narrowed thanks to a combination of Fed actions and the expansion of Fannie-Freddie lending. And the administration very much wants to keep this kind of intervention going.

You can argue that some other policy — inflation targeting by the Fed, expanded fiscal stimulus, whatever — would be better. But none of these things seem politically possible.

Keeping Fannie and Freddie fully engaged in the mortgage-support business is one of the few tools available to prop up a still very weak economy. And so they’re doing it.

Click-->Back to main page

No comments:

Post a Comment