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The Credit Squeeze And The Fed’s Indifference

Wednesday, August 8, 2007  |  posted by Hugh Hewitt
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The spreading credit squeeze is a problem that could become a large problem, which could become a huge problem. The Fed stuck to its anti-inflation guns yesterday, and would-be home buyers and home-sellers are screwed. “A growing credit crisis is prompting lenders across Massachusetts to cut back suddenly on new loans,” the Boston Globe reported this morning, “making it difficult for even creditworthy borrowers to get mortgages and causing some home sales to fall through at a time when the housing market is already slumping.”

The strangling of bad mortgage lending practices was a good move, but the smothering of mortgage activity is a serious indicator that overreaction to sloppy credit practices is having the sort of effect that can trigger recession. Six weeks ago an economist at the lefty Center for American Progress noted Fed Chairman Ben Bernanke was arguing that “problems in the subprime mortgage market-rising delinquency rates and foreclosures-are unlikely to spill over to the broader housing market.” Yesterday the Fed sniffed at credit tightening and its ill effects and refused to lower rates, noting that inflation remains a concern:

Some investors read the remarks to mean that chairman Ben S. Bernanke won’t rush to cut rates in response to a rout in the subprime mortgage market that has prompted lenders to restrict borrowers’ access to credit with higher rates and fewer down-payment concessions. The world’s largest economy will survive the tumult, the central bank added.

“Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing,” the Fed said. “Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.”

Perhaps it is because I just read Amity Shlaes’ The Forgotten Man which records the woeful response of economic policymakers under both Hoover and FDR to deflation, but the Fed’s attitude of “let the housing market suffer for the sins of subprime” seems to me to be an echo of that era that I haven’t heard before.

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