A weekend topic starting with the Wall Street Journal. "From “Tying Down the Anchor: The Task Gets Tougher,” a paper by Kevin Warsh presented May 3 at a Hoover Institution conference: For most of the post-crisis period, the Fed grew the size and scope of its balance sheet in order to provide greater monetary accommodation. In recent months, the Fed announced another big shift in its balance sheet plans. It would maintain a large balance sheet on a seemingly permanent basis."

"But, no longer was monetary policy the rationale. The Fed justified its new policy stance on regulatory and operational grounds: the big banks need high quality, Fed-provided reserves. But, what happens when the bright line between monetary and regulatory policy fades? And when the line between monetary policy and fiscal policy blurs? Line-crossing poses real risks."

"This is not about party or president. If Congress does not have the votes for an extension of the debt limit, why not get emergency relief from the Fed. If the appropriations process is deadlocked, call on the Fed to fund a government agency directly. If housing prices are falling, push the Fed to buy mortgages. If Congress and the administration cannot agree on new fiscal policy, pressure the Fed to provide more stimulus."

"If the Fed becomes a general purpose agency of economic policy, it will lose its special monetary prerogatives. And the printing press it keeps will be a temptation for mischief. Modern Monetary Theory (MMT) is the new name for an old temptation to conflate monetary and fiscal policy."

From News Central. "Whether it was the physicist Niels Bohr or the baseball player Yogi Berra who said it – or, most likely, someone else – it is indeed hard to make predictions, especially about the future. In November 2006, Alan Greenspan, who earlier in the year had stepped down from his position at the US Federal Reserve, explained that ‘the worst is behind us’ with regard to the housing slump."

"Let’s return to history and the historian’s tool kit, which for a variety of reasons in recent years have become a bit less déclassé in the minds of economists and other social scientists. So what accounts for the recent change of course? For starters, there was the Great Recession – or ‘Lesser Depression’, as Paul Krugman called it in 2011 – which seemed to a few influential economists such as Ben Bernanke, Carmen Rinehart, Ken Rogoff and Barry Eichengreen similar in many ways to other financial crises in the past."

"Had they not spurned or, at best, passed lightly over history, more economists would have sensed in the run-up to the 2007-9 financial crisis that the situation, as Rinehart and Rogoff suggest, maybe wasn’t so different from earlier financial crises after all."

"To be sure, Rinehart and Rogoff were not arguing that the 2007-9 financial crisis was exactly the same as earlier financial crises. Rather, they believe that the present is not free-floating but bounded, that the past matters, and that it can provide important lessons to those who study it in a systematic, or at least disciplined manner. In other words, economists – not to mention sociologists and political scientists – would do well to supplement their stock-in-trade, analytical rigour, by thinking more historically."

"So, bottom line: economic forecasters would profit from thinking a bit more about history before gazing into their crystal balls, or at least before telling us what they see. If economic seers don’t want to think more historically or use empirical data more rigorously, they should at least hedge their bets."

"As a piece in The Wall Street Journal advised last year, put the chances of something happening at 40 per cent. If that something does in fact happen, one looks good. If it doesn’t, one can always say: ‘Hey, look, all I meant was that it was a strong possibility.’"

From Bloomberg Opinion. "Trump administration officials announced last week that if Congress doesn’t come up with a plan to overhaul Fannie Mae and Freddie Mac in the next couple years, they will. Their plan is to simply privatize the two giant mortgage banks. A better one would be to liquidate them."

"Fannie Mae and Freddie Mac have been under the control of the government ever since they were nationalized during the Great Recession a decade ago. The federal government took responsibility for Fannie and Freddie’s debts, and in exchange gets to keep all their profits. On the surface, the deal has worked out for the U.S. Treasury: The government paid out roughly $191 billion in bailout money and has earned about $280 billion in profits."

"That gain, however, masks the enormous liability that taxpayers are carrying — and the way in which Fannie and Freddie make the mortgage markets more risky. Fannie and Freddie are middlemen. They buy loans made by banks and retail mortgage lenders, then repackage them into mortgage-backed securities that they sell to investors. These securities come with a guarantee that payments will be made on time even if the original borrowers are late or default on the mortgage."

"Currently about $4.7 trillion of mortgage-backed securities are guaranteed by Fannie and Freddie. The theory is that this guarantee makes it cheaper for Americans to buy homes because it makes investors willing to purchase mortgage-backed securities and thus fund the issuance of new mortgages. In practice, however, Fannie and Freddie loans tend to be slightly more expensive than so-called 'jumbo loans.'"

"While a small percentage of jumbo loans are sold to Wall Street, most are held by the lender. And precisely because they are holding on to the loans, lenders typically have higher standards. In 2018, the average credit score for someone with a jumbo loan was 18 points higher than for a homebuyer with a mortgage backed by Fannie or Freddie."

"So, to review: Fannie and Freddie don’t actually lower costs, but they do lower standards."

"By keeping the securitization market alive today, they are discouraging banks from developing expertise in evaluating individual borrowers and deciding which credit risk they are willing to hold. They are also weakening the ties between mortgage lenders and the communities they serve."

"Economists, myself included, used to see those types of tangible links between businesses and their communities as antiquated. The financial crisis and subsequent slow recovery have changed my view. The primary responsibility for home mortgage lending belongs with private banks."