David Dayen: BofA/Merrill Lynch Analyst Says QE and Housing Policy Boosting Inequality

By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

Anyone surprised by the housing recovery is simply blind to the context that the Federal Reserve has administered a bazooka full of aid and comfort over the past few years. They bought up enough mortgage bonds to force interest rates to near-record lows, boosting the fortunes of asset holders. And in so doing they made housing an attractive investment product, bringing lots of Wall Street cash into the REO-to-rental play, at least for a short while. That predictably increased demand and put housing prices on their current trajectory.

The promising winds could shift come autumn, however. Too much dumb money entered the investor purchase market, and the Fed is likely to decide to Septaper in a couple weeks. This has already impacted credit markets; 10-year Treasuries hit 3% briefly yesterday, and the 5% mortgage is likely not too far behind. Oddly enough, jumbo loans are actually now cheaper than conforming loans for the first time in anyone’s memory, partially because of banks wanting to hook rich homebuyers and partially because of the forced suicide of the GSEs (Matt Yglesias gets some of this wrong; the powers that be don’t want Fannie and Freddie to exist anymore, and they see increasing the g-fees as a means to that end).

But we have to wonder just how bad this outcome is. Who has benefited and who has suffered from the policy decisions in housing and monetary policy over the past few years? According to a remarkable little report from mortgage-backed securities analysts at Bank of America Merrill Lynch, “the cost burdens are disproportionately impacting low-income groups and renters.” (You could probably have guessed that one yourself.)

One important insight here is that “easy monetary policy,” as evidenced by QE, is correlated with the rise in income inequality over the past 35 years. The two periods over this time where inequality really shot up came right after recessions in 1991-93 and 2007-11. These two periods were characterized by aggressive monetary policy, including quantitative easing. Since the primary credit channel in the successive rounds of QE targeted assets for either the rich or near-rich, this stands to reason.

But the primary focus of the paper is housing, and the centrality of it in Bernanke’s QE policy. He basically created the conditions for a rise in home prices, thinking that would have great positive effects for the economy. BofA/Merrill cites a Harvard State of the Nation Housing report to question that received wisdom. After all, rising home prices, more than anything, raises the cost of housing. And the key question, then, is “Cui bono”:

The report starts with comments on the benefits associated with housing’s revival, such as home equity accumulation, but it quickly turns to a starker reality, which is that “the number of households with severe housing cost burdens has set a new record.” This language would be more consistent with the view of housing expressed in gold terms – housing is not a good news story. Moreover, the report shows that the hardest hit in the population are renters and those at the low end of the income distribution. As Exhibit 4 highlights, the share of renters in the population, now at 35%, has been rising in recent years, as the homeownership rate has steadily declined from the bubble peak in 2004. So not only are renters disproportionately sharing in increased housing costs, the percent of households in this category is increasing in the wake of the financial crisis.

The Harvard report defines two categories of households with respect to housing costs as a share of income: moderately burdened and severely burdened. Moderately burdened households pay 30%-50% of pre-tax income for housing; severely burdened households pay more than 50%. Exhibit 5 and Exhibit 6 show the evolution – and growth – of the “burdened,” which combines moderately and severely burdened, from 2001 to 2007 to 2011, with breakouts between owners and renters. The data show that rising home prices laid the burden primarily on owners between 2001 and 2007, but as home prices declined and credit tightened, the burden shifted to renters. Most importantly, in aggregate, between 2001 and 2011, there was a 35% increase in the number of burdened households, for a net addition of 11 million households to the burdened category. The percent of burdened households grew from 29.4% to 36.8%.

The analysts note that, even with mortgage rates plummeting from 7% to 4% from 2001 to 2011, 42 million households experienced moderate or severe housing costs. (And the whole thing doesn’t take into account negative equity.) And renters took the brunt of this stress in the later period; by 2011, an incredible 50% of all renters were burdened by high housing costs.

“It is difficult to imagine this was the policy objective behind lowering mortgage rates,” the analysts write with a wink. But that’s what happened. A persistent foreclosure wave, tighter credit and increased rental demand led to higher rental prices and more stress on those at the lower end of the income scale. Meanwhile, those who could get credit were rewarded with cheap interest rates, while those who couldn’t ended up paying through the nose for rent. Returns on rental PROPERTY in 2011 were quite high, in the double-digits; rentiers benefited mightily from this squeeze. My understanding of the market is that this has moderated somewhat and rental price gains have slowed. But with wages stagnant, the rent still takes up an inordinate amount of the monthly budget.

This massively impacts quality of life. According to the Harvard study, individuals in the bottom quartile of the income distribution with affordable places to live spend 19% of their monthly expenditures on housing; those with severe burdens spend up to 60%. This has an incredible domino effect on all other ordinary purchases, including food, health care, education and transportation. Leading to a pretty radical set of conclusions, considering they come from bank analysts:

If monetary policy is in fact responsible for increasing housing cost burdens through policies that have inflated home values, then it is also responsible for limiting the available dollars that lower income families have to spend on education. If unequal access to education is indeed a key driver of growing income inequality, then it appears as if the vicious cycle of rising home prices, higher housing costs, less money to spend on education and greater income inequality is poised to continue. In particular, in its latest FOMC statement (July 31, 2013), the Fed thought it necessary to add a statement that it was concerned with the recent rise in mortgage rates, suggesting again that rising home prices is a policy goal.

In addition, if individuals have so little money leftover after shelling out for housing, inflation remains low from a supply/demand standpoint. “Perversely, the more the Fed boosts home prices through QE, and thereby increases housing cost burdens for lower income cohorts, it may well be further pressuring inflation lower,” the analysts write.

Ultimately, these analysts are giving advice to institutional investors, and warning of the risk of an early exit for QE, though the way they get around to it is quite amazing. They conclude that Obama is concerned with inequality, and thus wants to install Summers at the Fed to curtail QE. This is silly for a couple reasons; by the time any replacement for Bernanke gets there, QE’s probably going to be over anyway. And as to Obama, I think this gets things backwards, especially if you look at his recent comments on housing policy. The President said in his Zillow chat that institutional investors scooping up distressed properties was “good business sense”; his sympathies obviously lie there, rather than with those stressed by the consequences of these actions. Similarly, there’s been all this talk about the future of housing finance, and far less about the future of those who have to live in that housing.

It’s hard to escape the proposition that monetary policies which inflate asset prices and increase real-world costs, particularly at the low end of the spectrum, represent a feature, not a bug.

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About David Dayen

David is a contributing writer to Salon.com. He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. profoundlogic

    Of course the inequality is a feature of these policies. This was designed to be a profit skimming operation from the beginning, 100 years ago. When a group of bankers get together in secret and decide they’re going to “manage” the economy, it would be delusional to think they’re going to manage it for the greater good. Sure, there will be the apparent lip service and happy talk about full employment and stable prices, but behind the scenes what you’re left with is a bunch of wealthy, caucasian-collared criminals masquerading as policy experts.

    1. Carla


      However, thanks to Dave Dayen for describing some more outrageous wrinkles in the quilt that cloaks the Fed, including this one:

      “Moderately burdened households pay 30%-50% of pre-tax income for housing; severely burdened households pay more than 50%.”

      Almost spat my coffee out. I remember applying for a mortgage back in the 80s, when to qualify for a conventional loan without mortgage insurance, you had to have 20 percent down, and the payments could not exceed 25 percent of your take-home pay. Things weren’t perfect by any means, but there was a middle class at the time.

      1. Larry

        Those conditions you talk about for getting a mortgage are sensible in that they likely prevented risky mortgages, sure, but at the same time it would curtail the treatment of dwellings as assets to speculate on. That’s precisely what the problem is with the way housing is financed.

        I’m renting a single family home in the Boston area and would like to get a bigger place to give the family some more space. Renting is out of the question as anything in the 3+ bedroom category is very expensive. And I’m less than thrilled with buying as prices still seem very inflated from the bubble and subsequent Fed QE re-inflation. I just can’t see spending $400k on a home that seems like it’s not in great shape.

      2. jrs

        Yea more than 50% of pre-tax income for housing. That’s a SHOCKING amount. I’ve always believed I can’t afford housing and thus rent. I pay less than 20% of my income for rent.

  2. taunger

    Every day my amazement grows that our deluded species believes it can control its fate, both individually, in nations, and as a species.

    Were this illusion lifted, perhaps we would have a chance at compassion and working toward supporting the least of us. Perhaps we have no power to aid, either, but I’d rather fail at a worthwhile cause than fail at an atrocity.

      1. taunger

        Well, by foresaking compassion for control, we get neither, because we aren’t really made to control out fate. Yet, as luck would have it, some still live lives of abundant material comfort, while others perish of malnutrition. Our mistaken attempt at an atrocity, control for selfish reasons, nevertheless leads to an atrocity, maldistribution for ignorant reasons.

        It is certainly more shades of grey than that, but in the harsh mid-day light is sometimes appears this way.

    1. MyLessThanPrimeBeef

      We are Homo Not-So-Sapiens Not-So-Sapiens at all.

      But I could be wrong.

      Maybe we are Homo Not-At-All Sapiens.

  3. Dan Kervick

    Obama wants Summers because he and his team, like all the Rubinites before them, probably believe that the financial sector is now over-regulated, and want to make sure that the Fed oversight and rule-writing that takes place over the next few years will occur under an economist known to be Wall Street friendly.

    This is a good article. If we had a sane attitude toward housing, we would realize houses are tools: machines that provide shelter and a hearth and comfort over decades. We would realize that they had grown drastically overpriced, and would see the fall in their prices as a good thing that was bringing supply back in line with demand, and would help clear the housing market, boost housing starts and make home-ownership affordable to millions of people on sound and ordinary credit terms.

    But that’s not how America’s affluent white homeowners and house speculators see houses. They see them as investment assets in their portfolios. So what they want the CB to do is boost those asset prices to bail them out from their ridiculous investments in assets whose prices had soared way beyond fundamentals. They believe this will cause a trickle down wealth effect. Their idea is to boost the housing market via breaks on the interest side, rather than reductions on the principle side.

    They also resent the fact that homeownership had grown too easy, since the distinction between homeownership and renting is a traditional class signifier. They support more renting and landlordship. They are happy to see houses gobbled up by the affluent and the speculators, the latter of whom can rent to the hoi polloi.

    These folks have the same ideas about college as well. For affluent and privileged whites, genuine liberal university education has grown too available, cheapening the product and eroding the class difference between the college educated and non-college-educated. Their attitude is that the rabble should now be discouraged from that kind of life, should adjust their expectations and should aim instead for the new world of cheaper, post-secondary trade schools.

    1. susan the other

      If it is an asset bubble, then it should be across all categories. Not just houses, but rents, the price of a new car or a used car, the cost of groceries, the cost of a university degree, the cost of medical care, wine, pot, clothing, all durable goods, all services. It wasn’t just a “housing” bubble. It was a big fat bubble of all and everything.

      1. Dan Kervick

        I don’t think so, Susan. Home prices jumped astronomically off the trend line in the years leading up to the crisis. Not so with the CPI. The crash was the consequence of what happened to a specific market: housing juiced by subprime lending and securitization. The whole western world got addicted to cash flows – and then phantom cash flows – from American Housemania.


  4. Robert Frances

    Good post, but the term “rentier” feels too academic, confusing amd almost perjorative. Why isn’t the term “landlord” perfectly descriptive for the economic activity that describes families and individuals receiving rent income from real property ownership?

    One of the few helpful concepts I heard in an econ course is that the study of economics involves the inter-relationship of three relatively simple economic players:

    Labor collects wages (in goods or currency). (Labor would collect 100% of the economic output but for the (often large) portion of economic output diverted to governments for taxes and the economic output diverted to landlords and capital owners.)

    Landlords collect rents. (Private property laws enable landlords to demand rents from anyone who wants or needs to use the property.)

    Capital investors in “plant and equipment” collect interest and dividends. (Modern governments have also become an excellent source for capital investors since they may be more stable than individual companies and the interest payments often give investors tax advantages compared to interest payments received from private companies.)

    Governments affect the relationships of these three basic economic players by imposing regulations, tax and monetary policies, but the interaction of these basic factors can describe any society’s productive output and the distribution of the output among the three players.

    Since landlords=rent income, labor=wage income, and capital owners=interest and dividend income encompass the primary forces of measured economic activity, it seems our communication is enhanced when we can use these descriptive and fairly accurate terms rather than introduce verbiage like “rentier” that is more likely to confuse the subject being discussed.

    Your observation is spot on about Pres Obama cheering investors who have been pushing rents and housing prices higher. How can it be good economic policy for increasing employment when a larger percent of our wages are being spent on rents and higher mortgage payments? The government obviously likes higher property values since they get more property tax revenue to spend. And the banks and landlords obviously like higher property values since they receive higher fee and rent incomes. But as you point out, the segments of the population paying these higher rents and housing prices are much worse off since they have less money to spend on goods and services that actually drive “real” economic output.

    When over 50% of families in many “advanced” economies are paying close to 40% of their income on housing costs, and those same families are paying another 40% of their income for combined federal, state, and local taxes, this doesn’t leave a lot of money left over to buy goods and services that actually create higher economic output and increased employment.

    The economic history of the world seems fairly simple:

    Some humans are more aggressive and smarter than other humans.

    Some of the aggressive and smart humans became warlords, landlords and slave owners. Relatively recently with the advent of money, bankers and financiers evolved to take an ever larger share of a society’s economic output.

    Modern governments protect and institutionalize the landlording, banking and other financing entities that benefit from collecting rents, fees and interest income.

    The tax laws greatly benefit landlords by giving them hundreds of billions of annual tax write-offs combined with low tax rates that make the potential returns from landlording very lucrative. And when property prices decline – which they always do eventually – the government is there to bail out the banks and bondholders and the landlords walk away from their mortgage debts. Many new homewowners that have mortgages get wiped out during these price downturns as well.

    In the US we’re still paying off the bonds from the S&L meltdown from the late 1980’s, which was a measly $1-2 trillion of new governemnt debt. The latest 2007-09 meltdown is another $6-8 trillion of government debt. The taxpayers in Ireland, UK and Japan are still paying interest and taxes for the bailouts of their banks and mortgage owners when their property prices collapsed. One day the Chinese taxpayers will bail out their banks when property prices decline.

    Housing and land policies across the globe are severely broken. The often lucrative rewards when property prices increase are mostly received by landlords, speculators and banks, while the risk is mostly borne by the taxpaying public when property prices decline.

    Until we shift taxes away from labor by repealing all payroll, sales/VAT, and income taxes on the lowest 2/3 of salary/wage earners, and until we impose high taxes on rent income and capital gains on landlords and speculators (a minimum 60% capital gains tax on landlords and speculators) and impose a gross receipts tax on the largest businesses to make up the tax shortfall from repealing regressive sales, payroll and income taxes on lower income households, and until we eliminate all of the tax loopholes given to landlords (eg, tax-free property exchanges, tax-free increases in asset basis from one generation to the next, interest expense and phony depreciation write-offs, etc.), we can expect the current economic malaise and downward trajectory to continue unabated.

    1. Carla

      @Robert Frances:

      1. What is wrong with using “rentier” as a perjorative?

      2. In a fiat system that is monetarily sovereign, such as the one we have in the U.S., there really is no such thing as government debt. It’s simply an accounting term.
      Check out MMT.

      3. Your last paragraph re: tax shifting looks as if it could have possiblities, but it’s way too complicated. Just fold the FED into the Treasury, issue new debt-free dollars into the economy to create jobs and build desperately needed physical and social infrastructure, and require banking in the private sector to meet full reserve requirements while charging competitive fees. Someone will figure out how to make money out of that last, I assure you.

      4. It is amazing what contortions people go through to avoid dealing with the elephant in the room: money as debt.

      I’m prepared for some horrified comments in response to this one. Please, set me straight, folks. Or set me curvy. I’m here to learn.

      1. Robert Frances

        1) Is this snark? I was under the impression that this was mostly an economics blog. If so, the economics field already has fairly well-defined terms to describe economic players such as lenders and landlords who collect interest income and rent income respectively. Introducing muddled and imprecise terms like “rentier” seem designed to mostly confuse people or conflate otherwise useful economic concepts.

        2) Government debt does matter. Every month the government pays out tens of billions of dollars of interest from money collected from taxpayers. These interest payments are sent to the wealthiest and most powerful families on earth. Since many of the taxes the government uses to collect revenue are regressive in nature, in effect the government takes money from lower and middle-income working people and transfers it to the wealthy. Why do you think this is a good thing?

        If you want to eliminate the Federal Reserve Bank and allow the government to issue money directly so that there is never any government debt, then you’re correct. Without debt there is no interest paid. But the increase in the money supply will debase the currency and likely lead to price inflation. Neither of these issues are insignificant.

        3) Why would we want to add more dollars to the economy just to provide some make work government jobs? Government transportation policies have already paved over much of the country and destroyed open space, farmland and wildlife habitat in the process. The sooner the government gets out of the transportation business, the sooner our land-use patterns will improve. As stated above, all of the dollars added to the economy from make-work will debase the currency and cause prices to rise.

        Technology has, and is, eliminating tens of millions of jobs that will never return. Rather than use government make work projects to employ people, it makes more sense to reduce the nominal work week to 20 to 30 hours per week, which will absorb tens of millions of jobs thereby creating full employment. It also gives people time (freedom) to pursue other activities in life such as hobbies, starting small businesses, spending time with family, volunteering, or a thousand other uses of their time other than working a long work week.

        1. Carla

          1. I apologize for snark.

          2. In a fiat money system, I’m not sure what you mean by “debase” the currency. Although I’m probably not using the word the same way you would, our currency seems to me to be quite “debased” already, with far too much of it in the hands of those who refuse to do anything productive with it. As far as I can tell, QE has just accelerated the too-much in the wrong hands problem.

          According to the MMT folks, if price inflation became a concern, the federal government could (and should) increase taxes to take money out of the system.

          3. Your repeated use of the phrase “make work” in reference to what I described as the government spending money directly into the economy is revealing. Has anyone ever referred to a researcher at the National Institutes of Health as having a “make work” job?

          I share your concern about land-use patterns and suggest that re-building crumbling bridges, as well as century-plus-old sewer, water and natural gas delivery systems in large metropolitan areas could also be done strategically to improve land-use patterns. It seems to me unlikely that “the market” can or will do these things.

          In my previous comment I also suggested government spending money into existence to create the social infrastructure sorely needed by everyone (or at least the 99%): universal access to good health care, vastly improved public education, and so forth.

          Your suggestion to reduce the work-week to 20 or 30 hours makes plenty of sense to me. However, I don’t see how it conflicts with the government spending debt-free money into existence to fund a sustainable economy that meets the real needs of real people.

          1. Lambert Strether

            Hoexter’s post today gives examples of a lot of work that’s crying out to be done.

            Also, isn’t the entire health insurance industry “make work”? “Make work” seems to be OK with you as long as a rentier collects a cut.

        2. Calgacus

          “Rentier” is not a neologism. It was used by Keynes, in his famous “euthanasia of the rentier” – referring to rentiers who were extracting money for doing nothing – bondholders, the financial sector, not just land rent.

          Many misunderstand MMT to say that governhment debt is not really debt, when it most certainly is. Money, any money, government money is debt too – there is no such thing as debt-free money. Yes government debt, whether in the form of bonds or base money does matter. But the point is to understand how it matters. The only problem is the possibility of inflation.

          But the increase in the money supply will debase the currency and likely lead to price inflation. Neither of these issues are insignificant. There is not the slightest evidence for the near universal belief, that “printing money” is more inflationary than “printing bonds”. If the government pays money to the unemployed to do real work, valuable work, why on earth should this be inflationary? The idea that working directly for the government mystically must be “make work” is absurd, and ignores the colossal amount of “private” sector make-work. In all likelihood, a JG would replicate the experience of the New Deal, the WPA etc – enormous benefit – and environmentally sound benefit – to the public and to the private sector. People who called and call it “make work” are simply lying. Extended period of increasing, full employment will lead to de-bulshittization of the private sector, the disappearance of private make-work.

  5. TomDority

    Lets not forget that taxing has been shifted onto the back of wealth creators ((( Wealth can only be created with labor ))) Wealth is not not not not money. Wealth is a paint brush, creativity, a pen cap, a house, a car, a paperclip – anything to which labor is used.
    Money – a human meta construct (NOT WEALTH OR A LABOR PRODUCT) that only follows the rules of a society for it’s use.
    Money is not land, land is not wealth until labor is applied to it. Land has no value – value is created by the presents of people – land has value once labor is applied to it – this should be the source of revenue for services – the part that should be taxed. In the neo-classical economic construct…this tax base is being extracted from the public into the hands of private individuals and, to the detriment of public good – as a result, values of land are not checked. The values that man’s work create are going into the hands of speculators and rentiers class – they are pulled out of the rightfull owners of the created value – from public investement, from the revenue system and into private hands.

    It is no suprise that our schools, our libraries, social security, single payer health, highways, bridges, electrical grid and all manner of public infrastructure is being decimated by budget shortfalls, why labor’s share of productivity has fallen and inequality has risen, why we feel helpless to motivate towards solutions to our global problems and environmental disasters. No suprise why the plutocrats spend so much effort in propaganda, politics, economic thought creation to privatize all things and to de-tax their income sources to their advantage – their aim is to extract wealth that others have created…to monopolize and destroy public financing and the tax base which supports it – all to enure to their benefit.
    It is no accident in this neo-classical economic system and, because this system is so entrenched in schools and society – the actors (who are only following the natural flow of this economic construct) feel that they are doing what they have been taught – it is the flagrant, immoral bastards that are pointed out as the bad apples – the ones creating the rot upon the apple – yet, what is missed is that the apple (neo-classical economics) is the rotten apple upon which we feed

    “In spite of the ingenious methods devised by statesmen and financiers to get more revenue from large fortunes, and regardless of whether the maximum sur tax remains at 25% or is raised or lowered, it is still true that it would be better to stop the speculative incomes at the source, rather than attempt to recover them after they have passed into the hands of profiteers.
    If a man earns his income by producing wealth nothing should be done to hamper him. For has he not given employment to labor, and has he not produced goods for our consumption? To cripple or burden such a man means that he is necessarily forced to employ fewer men, and to make less goods, which tends to decrease wages, unemployment, and increased cost of living.
    If, however, a man’s income is not made in producing wealth and employing labor, but is due to speculation, the case is altogether different. The speculator as a speculator, whether his holdings be mineral lands, forests, power sites, agricultural lands, or city lots, employs no labor and produces no wealth. He adds nothing to the riches of the country, but merely takes toll from those who do employ labor and produce wealth.
    If part of the speculator’s income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer’s income be taxed it will tend to limit employment and stop the production of wealth.
    Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn.”

    Written around 1925 !!!!!!!!!

  6. Mark A. Sadowski

    “The two periods over this time where inequality really shot up came right after recessions in 1991-93 and 2007-11. These two periods were characterized by aggressive monetary policy, including quantitative easing.”

    The article is implicitly referring to the big rise in Gini coefficients during these two periods. It rose from 0.428 to 0.454 from 1991 to 1993 and from 0.463 in 2007 to 0.477 in 2011 (Table A-2):


    But the size of the first increase is questionable given there huge change in methodology affecting the Gini ratio in 1993:


    More importantly by what standard was monetary policy “aggressive” during these two periods?

    Both periods were marked by increases in the unemployment rate and significant declines in the inflation rate. The unemployment rate rose from 6.8% in 1991 to 6.9% in 1993 and from 4.6% in 2007 to 8.9% in 2011. The inflation rate as measured by PCEPI averaged 3.8% from 1989-91 and 2.6% from 1991-93. It averaged 2.6% from 2003-07 and 1.8% from 2007-11:


    Measured by targets rather than by instruments monetary policy was tight during these two periods with very predictable results for income inequality.

  7. Mark A. Sadowski

    “If monetary policy is in fact responsible for increasing housing cost burdens through policies that have inflated home values, then it is also responsible for limiting the available dollars that lower income families have to spend on education.”

    The IMF has made it clear that loose monetary policy is not the primary cause of housing price bubbles (Page 106-107):

    “If monetary policy were the fundamental cause of house price booms over the past decade, there would be a systematic relationship between monetary policy conditions and house price gains across economies. Certainly, average real policy rates were low and even negative in some economies, and Taylor rule residuals were mostly negative, suggesting that monetary policy was generally accommodative across economies during this period. But there is, at best, a weak association with house price developments within the euro area (Figure 3.13, blue lines).22 And there is virtually no association between the measures of monetary policy stance and house price increases in the full sample (Figure 3.13, black lines). For example, whereas Ireland and Spain had low real short-term rates and large house price rises, Australia, New Zealand, and the United Kingdom had relatively high real rates and large house price rises. Moreover, the association between measures of the monetary policy stance and real stock price growth is extremely weak, whether assessed during the global house price boom (2001:Q4–2006:Q3; not shown) or during a later period, when stock markets rallied from their troughs (2003:Q1) through the stock market declines of 2007 (Figure 3.14).

    The fairly regular behavior of inflation and output and the fact that Taylor rule residuals were not associated with recent asset price rises across economies in the sample suggest that monetary policy was not the main or systematic source of the recent asset price booms.23”


    Figure 3.13 is similar to the following graph (note the near zero coefficient of determination):


  8. Mark A. Sadowski

    “In particular, in its latest FOMC statement (July 31, 2013), the Fed thought it necessary to add a statement that it was concerned with the recent rise in mortgage rates, suggesting again that rising home prices is a policy goal.”

    Here is the original QE1 announcement:

    “The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)–Fannie Mae, Freddie Mac, and the Federal Home Loan Banks–and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”


    Notice there is absolutely no mention of supporting house prices. QE1 was expanded in March 2009:

    “In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments.”


    Again, no mention of supporting house prices.

    QE2 made no purchases of Agency securities at all. Hence the purpose was largely unrelated to housing:

    “To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”


    And here is the purpose of QE3 as described at its announcement:

    “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”


    So once again, no mention of supporting house prices. The program was expanded in December 2012:

    “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”


    The bottom line: five separate major monetary policy announcements and not one mention of raising house prices as a policy goal.

  9. Mark A. Sadowski

    There is no evidence of a relationship between QE and house prices across countries. Since 2008Q2 the monetary bases of the US and the UK have been increased by 277% and 355% respectively. In contrast the monetary base of the eurozone has only been increased by 41%. (The ECB has never done and has no plans to do QE.) From 2008Q2 to 2013Q1 house prices have fallen by 9.0%, 5.0% and 2.3% in the US, the eurozone and the UK respectively:


    And until 2012Q3 house prices had fallen less in the eurozone than in the UK, so prior to that house prices fell more in the currency areas that did QE than in the currency area that did not.

    True, the increase in nominal house prices was smaller in the eurozone (up 82.5% from 1995 through 2007) but if anything it was more widespread with only Austria and Germany not having large increases in house prices:


    So it is not the absence of an increase in house prices that explains the slower rate of decline in the eurozone.

  10. McWatt

    Small time landlords have been absolutely crushed in the housing
    market for the past decade. Local property taxes have far outpaced rents
    here in Cook County Chicago. Rents should be 20% higher just to stay flat. As one of the rentier class I wouldn’t wish this squeeze on anyone.

    This is not the case with the super rentiers whose large buildings get preferential tax treatment.

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