This obviously was not the objective of Congress and there is no evidence that _larger_ home consumption conveys benefits to the wider community.<sup>30</sup> More importantly, the most efficient way to encourage home ownership is the way Australia has periodically done it: Australia has subsidized the down payment of first time low income home buyers (by 50% in their case).<sup>31</sup> Banks in Australia do not change their standards, but with the larger down payments, many low and moderate income families, who could not qualify for mortgages without the down payment assistance, are able to qualify. This would put the cost of the program on the budget of the government, where the costs of the program would be transparent and subject to public scrutiny, rather than hidden in the costs of banks and private financial market participants. Many in Congress prefer to hide the cost of their programs (the problem is not limited to housing finance). Consequently, they avoid subsidies since they expose the costs of the program. But mandating a social objective onto private firms (in this case telling banks and Fannie and Freddie to lower their mortgage standards) and ignoring the adjustments that markets will inevitably make, can have much greater costs, as we are all painfully learning.

# **Low Interest Rates as a Contributor to the Crisis—Due to Monetary Policy**

Taylor (2007; 2009) has argued, the low interest policy of the Federal Reserve from about January 2002 to early in 2006 contributed to the housing boom and ultimate bust. The Federal Reserve set the federal funds rate at less than two percent from January 2002 to late 2004. This was considerably below (by about 3 percentage points in 2004) the level needed for price stability based on historical data, i.e., less than prescribed by the “Taylor rule.” Although this did not translate into an increase in the money supply,<sup>32</sup> Barth _et al_ ., (2009, p.7) explain that this induced a drop in mortgage rates, especially in the one year rate on adjustable rate mortgages

> 30 See Glaeser and Shapiro (2002).

> 31 The costs of such a targeted subsidy program for low and moderate income earners would have to be weighed against the benefits, and would likely justify a small subsidy program.  See Bourassa and Yin (2006) for a comparison of the impacts of the US and Australian approaches.  In 2008, however, the US implemented a program of interest free loans for first time home buyers (or buyers who have not owned a home in the past three years) for homes purchased between April 9, 2008 and July 1, 2009. The program allows a tax credit of up to $7,500, which must be paid back interest free over a period up to 17 years.

> 32 Based on data available from the Saint Louis Federal Reserve website, the rate of growth of M2 for the ten year period ending in 2006 was 5.8 percent or  6.1 percent  in the seven years ending in 200. This is a lower rate of money supply growth than in any of the final four final decades of the 20th century, except for the 1990s.  M3 growth, up until discontinuance of the series in February 2006, tells a similar story. Specifically, the average growth rates in M2 (M3) by decades are the following: 1960s, 7 (7.6) percent; 1970s, 9.5 (11.1)  percent; 1980s, 8 (8.7) percent; 1990s, 4 (4.6)  percent.  M3 growth from January 2000 to February 2006 was 7.7 percent, and 7.8 percent from January 1996 to December 2005.