Congress and Fed Disagree on Best Path to Economic Recovery

With a common goal of economic recovery, Congress and the Federal Reserve diverge on the best means to that end. Should the housing sector serve as a financer of the government's economic policies, or should the government help boost the housing sector?

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Federal Reserve Chairman Ben Bernanke submitted a ""white paper"":http://www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf to Congress last week to ""provide a framework for thinking about directions policymakers might take to help the housing market.""

Bernanke expressed support of an REO rental program and stressed the importance of credit access.

Bernanke stated that in order to fund these initiatives, ""losses must ultimately be allocated among homeowners, lenders, guarantors, investors and taxpayers.""

In addition, he stated, ""some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.""

Following the white paper, two other Fed members spoke out in favor of Bernanke's suggestions.

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Congress, on the other hand, has already taken action to use funding from the GSEs to fuel its economic policies.

The extension of the Temporary Payroll Tax Cut relies on housing for its financing. The ""law"":http://dsnews.comarticles/new-law-requires-gses-increase-guarantee-fees-2012-01-03 calls on the ""Federal Housing Finance Agency"":http://www.fhfa.gov/ to raise the GSEs' guarantee fees

Additionally, one member of Congress believes Bernanke has overstepped his bounds by releasing his white paper last week.

""I believe that your recent housing white paper, and recent advocacy by Federal Reserve officials for further taxpayer-funded government ‘intervention' in housing and mortgage markets, intrudes too far into fiscal policy advice and advocacy,"" stated Sen. Orrin Hatch (R-Utah) in a letter Tuesday to Bernanke.

After what Hatch called the Fed's ""extraordinary interventions in the economy"" during the financial crisis, Hatch hopes to restore the ""distinction between monetary policy and fiscal policy.""

Speaking out on the debate, Paul Dales, senior economist at Capital Economics says, ""It is not clear which side will win this tug of war, but it seems unlikely that policymakers will agree to any action big enough to generate a significant housing recovery.""

Dales suggests one compromise between the divergent views of Congress and the Fed would be for Treasury to designate TARP funds for housing policy implementation.

While Treasury would not require Congressional approval to do so, Dales says Treasury may be reluctant to begin allocating TARP funds ""when there has been no obvious return from the money it has already spent on HAMP.""

Regardless, Dales says without investment in housing policies, ""the best that can be hoped for is a fairly modest and very protracted housing recovery.""