Dynamic concept Monetary policy

A belated housing recovery and why Fed to give a hand

It was reported today that sales of existing homes in the U. S. in January and February were at their higher level since 2007, though the number in February edged down by 0.9% from January on a seasonally adjusted basis. Recent numbers have suggested real-estate markets are showing signs of life as falling prices spur buyer demand, lifting home sales and new construction from the depressed levels of the past few years. Sales are going up, inventory coming down, though home prices remaining weak.

The housing depression in the U. S. is now sixth year and its recovery much lags the rest economy. Looking at corporate earnings, the U. S. economy is well on the way of recovery; Employment, while is still high at 8.3%, has dropped significantly from over 10%.

From an economy control perspective, the lag in housing recovery in reference to the rest of the economy is very problematic. The dynamics of major components of the economy are synchronized (with minor inherent delay such as employment) in normal time. The coupling of these major economic components makes the economy as a system so that one macro control policy will serve all purposes. The Fed can exercise control via monetary loosing or tightening when required. However, when the housing is asynchronized with the rest components of the economy, a macro economy policy would have very different or even opposite effects on different economic components. If the economy is heated up and causes excessive inflation, the Fed would have to tighten monetary policy, however, the tightening would have negative impact on the housing which is still weak.

The decoupling of the housing from the economy has decentralized the economy system so that a centralized control would create a conflict. It is practical difficult to have different monetary policies for housing and for the rest of the economy – the Fed cannot have a rate for housing and a different rate for company borrowing. That’s why I believe the Fed will very soon engineer a specific stimulus for housing to spur its recovery so that the housing can be re-coupled with the rest of the economy and the unity of the economic system is protected.

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