Doug Elmendorf's view:
Notes on Policy Responses to the Subprime Mortgage Unraveling: In recent months, rising delinquencies and foreclosures of subprime mortgages have caused turmoil in broader financial markets, raised fears that many subprime borrowers could lose their homes, and led economic forecasters to boost the estimated odds of a recession next year. These economic and financial developments raise... broad policy questions.... These notes offer my answers.... My goal is not to be original, but rather to present a compilation and critical appraisal of many ideas that have been discussed by analysts.... I conclude:
- The Federal Reserve should reduce, but not slash, the federal funds rate, unless stronger evidence emerges of a freezing-up in credit markets or a significant slowing in overall economic activity.
- Monetary policy should have been slightly less expansionary in 2004 and 2005, but this would not have materially altered recent events.
- The government should help struggling households to refinance their mortgages, but this help should be reasonably narrowly targeted and should avoid harming the mortgage market and other financial markets in the long run.
- The government should place greater restrictions on the mortgages offered to riskier borrowers, but it should try not to dampen financial innovation generally.
- Federal banking supervision does not need to be extended to all mortgage lenders.
- However, the government should strengthen its oversight of credit rating agencies.
I disagree with Elmendorf's (6): I do not really see what the government can do in the credit-rating field that is likely to be useful. I also disagree with (5): anything that is a bank--that leverages its capital by borrowing short and lending long and in the process tells those from whom it borrows that their assets are more liquid than its assets--needs to be under the regulatory umbrella to some degree; and mortgage lenders are definitely banks in this sense.