Karen Petrou: A Pragmatic Vision of a Purposeful Home Loan Bank System
Although a new paper by former FRB Gov. Tarullo and Fed staffers on the FHLB stirred considerable consternation across the Federal Home Loan Bank System, it’s a crushing and persuasive critique of a giant GSE that has long preferred to go unnoticed. That’s not unreasonable since the System has evolved from an essential small-bank funding source for mortgages into a taxpayer-subsidized capital-markets investment option. When public wealth is not allocated for public welfare, resources are misallocated and market integrity is compromised. But, unless the Home Loan Banks blow themselves up, they are here to stay. Thus, the policy challenge is not how to abolish them, but how best to redirect an established funding channel back to servicing the public good. Traditional single-family mortgages don’t need the Banks anymore, but much else does.
The paper’s criteria for considering taxpayer subsidies are a very helpful guide for moving forward and thus worth quoting at length:
“There is, of course, nothing inherently wrong with government subsidies. But subsidies should meet two conditions if they are to be sound public policy. First, they must be shown to be correctives for identified market failures or instruments of targeted redistribution policies. Second, there must be governance mechanisms to ensure that the subsidies are used to achieve the ends specified by the legislature or regulator, and not for other purposes.”
I suspect the authors would agree with a third point: if a credible, forward-looking case for the subsidy cannot be made by virtue of demonstrable public benefits …