{"id":18717,"date":"2020-06-26T08:04:18","date_gmt":"2020-06-26T08:04:18","guid":{"rendered":"https:\/\/www.revoscience.com\/en\/?p=18717"},"modified":"2020-06-26T08:06:50","modified_gmt":"2020-06-26T08:06:50","slug":"helping-consumers-in-a-crisis","status":"publish","type":"post","link":"https:\/\/www.revoscience.com\/en\/helping-consumers-in-a-crisis\/","title":{"rendered":"Helping consumers in a crisis"},"content":{"rendered":"\n

\u201cQuantitative easing\u201d program let households spend more during the last recession. Could it work again?<\/strong><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

A new study shows that the central bank tool known as quantitative easing helped consumers substantially during the last big economic downturn \u2014 a finding with clear relevance for today\u2019s pandemic-hit economy.<\/p>\n\n\n\n

More specifically, the study finds that one particular form of quantitative easing \u2014 in which the U.S. Federal Reserve purchased massive amounts of mortgage-backed securities \u2014 drove down mortgage interest rates, allowed consumers to refinance their house loans and spend more on everyday items, and in turn bolstered the economy.<\/p>\n\n\n\n

\u201cQuantitative easing has a really big effect, but it does matter who it targets,\u201d says Christopher Palmer, an MIT economist and co-author of a recently published paper detailing the results of the study. <\/p>\n\n\n\n

All told, the study finds, the Fed\u2019s so-called QE1 phase from late November 2008 through March 2010, a part of the larger quantitative easing program, generated about $600 billion in mortgage refinancing at lower interest rates, bringing about $76 billion worth of additional spending back into the broader economy.<\/p>\n\n\n\n

However, as the study also demonstrates, the people benefitting from QE1 were a relatively circumscribed group of mortgage holders: borrowers from the Government Sponsored Entities (GSEs) Fannie Mae and Freddie Mac. So while observers may talk about quantitative easing as a \u201chelicopter drop\u201d of money, scattered across the public, the Fed\u2019s previous interventions were relatively targeted. Recognizing that fact could shape policy decisions in the future. <\/p>\n\n\n\n

\u201cIt\u2019s not like the Fed drops money from a helicopter and then it lands randomly and uniformly and equally across the population, and people pick up those dollars and spend money and are off to the races,\u201d Palmer says. \u201cThe Fed intervenes in specific ways, and specific people benefit.\u201d<\/p>\n\n\n\n

The paper, \u201cHow Quantitative Easing Works: Evidence on the Refinancing Channel<\/a>,\u201d is published in the latest issue of the Review of Economic Studies<\/em>. The authors are Marco Di Maggio, an associate professor at Harvard Business School; Amir Kermani, an associate professor at the Haas School of Business at the University of California at Berkeley; and Palmer, the Albert and Jeanne Clear Career Development Assistant Professor at the MIT Sloan School of Management.<\/p>\n\n\n\n

Mortgage relief for some<\/strong><\/p>\n\n\n\n

The introduction of quantitative easing during the Great Recession was a notable expansion of the tools used by central banks. Rather than limiting its holdings to treasury securities, the U.S. Federal Reserve\u2019s purchase of mortgage-backed securities \u2014 bonds backed by home loans \u2014 gave it more scope to boost the economy, by lowering interest rates in another area of the bond market.<\/p>\n\n\n\n

The first round of quantitative easing, QE1, which began in November 2008, included $1.25 trillion in mortgage purchases. The second round, QE2, which started in September 2010, focused exclusively on treasury securities. The third round, QE3, was initiated in September 2012 and was a combination of mortgage and treasury security purchases.<\/p>\n\n\n\n

To conduct the study, the researchers drew heavily on a database from Equifax, the giant consumer credit reporting agency, which includes detailed individual-level information about mortgages. That includes the size of individual loans, their interest rates, and other liabilities. The database covered about 65 percent of the mortgage market.<\/p>\n\n\n\n

\u201cIt basically allowed us to trace the flow of Fed mortgage purchases down to individual households \u2014 we could see who was refinancing when the Fed was intervening to make interest rates lower,\u201d Palmer says.<\/p>\n\n\n\n

The study found that refinancing activity increased by about 170 percent during QE1, with interest rates dropping from about 6.5 percent to 5 percent. However, the Fed purchasing activity was highly focused on \u201cconforming\u201d mortgages \u2014 those fitting the guidelines of the GSEs, which often mandate having loans cover no more than 80 percent of a home\u2019s value.<\/p>\n\n\n\n

With the Fed not aiming its resources at nonconforming mortgages, much less refinancing occurred from people with those kinds of home loans.<\/p>\n\n\n\n

\u201cWe saw a really big difference in who seemed like they were getting credit during quantitative easing,\u201d Palmer says.<\/p>\n\n\n\n

That means QE1 bypassed many people who needed it the most. Consumers with nonconforming mortgages, on aggregate, were in worse financial straits than people who could put more equity into their homes initially.  <\/p>\n\n\n\n

Checking the data geographically, the researchers also found that much less refinancing occurred in the \u201csand states\u201d where a huge number of subprime, nonconforming mortgages were issued \u2014 especially Florida, Arizona, Nevada, and the Inland Empire region of California.<\/p>\n\n\n\n

\u201cPeople who are outside the conforming mortgage system are often those who need help the most, whether that\u2019s because their loan size is too big, or their equity is too small, or their credit score is too low,\u201d Palmer says. \u201cThey often needed the stimulus most and yet couldn\u2019t get it because credit was too tight.\u201d<\/p>\n\n\n\n

Take it easy<\/strong><\/p>\n\n\n\n

Given both the success and targeted nature of QE1, Palmer suggests that future interventions could be broadened.<\/p>\n\n\n\n

\u201cOne of our takeaways is that if the Fannie and Freddie requirements can be temporarily loosened, then Federal reserve QE purchases can do a lot more good, because they can reach more borrowers,\u201d Palmer says.<\/p>\n\n\n\n

More broadly, surveying the economic landscape as the Covid-19 pandemic continues, Palmer says we should continue to examine how central banks can provide relief, and to whom. With interest rates very low, the U.S. Federal Reserve cannot offer much broad relief by adjusting rates. More help may come from efforts like the Main Street Lending Program facilitated by the CARES Act, which runs through September.<\/p>\n\n\n\n

\u201cWhen credit markets get locked up, there\u2019s less opportunity for your local restaurant or auto-body garage or toy store to take advantage of the fact that the interest rates are lower,\u201d Palmer says. Instead, targeted programs are \u201creally an attempt to focus the monetary stimulus directly from the Fed to the people who need it.\u201d<\/p>\n\n\n\n

To be sure, consumers gaining credit relief may not be as willing to spend right now as they were in 2008 or 2010. But given the economic struggles of 2020, freeing up any additional spending would be productive, Palmer says.<\/p>\n\n\n\n

\u201cIf people can refinance right now, they\u2019re probably not going on shopping sprees,\u201d he says. \u201cBut there is still a lot of consumption happening that is very valuable.\u201d<\/p>\n\n\n\n

( Provided by MIT News)<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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