What is the Federal Reserve’s end game by suggesting ways to fix the housing market? A recent letter from the Fed to Congress suggests ways to buoy home prices and by doing so to fix the housing market.

The Fed wants to increase home values so homeowners feel wealthy and spend more and help the economy recover. Is this the foundation for economic recovery we need?

Move over Wall Street banks, here comes the “Wall Street” Fed. How did we get into this mess in the first place? During the bubble, home values rose, so households felt wealthier. The way they increased consumption was by taking out loans against increasing home values. Wall Street banks, motivated to help households take on more debt, made it happen.

In retrospect, we learned that the debt-fueled consumption bubble was not sustainable. The growth in debt could not be supported for the long term by household income. Yet now we have a Federal Reserve that wants to take its turn at making you feel wealthy so you will consume more.

The Fed wrote in its letter to Congress:

“Obstacles limiting access to mortgage credit even among creditworthy borrowers contribute to weakness in housing demand, and barriers to refinancing blunt the transmission of monetary policy to the household sector.”

Yet here’s what Richmond Fed President Jeffery Lacker had to say about monetary policy in a recent CNBC interview:

“We’ve known this for decades, that monetary policy has an effect on real growth that is transitory. It definitely has an effect on inflation. So to the extent we can get some traction it’s going to show up as inflation, maybe as an increase in growth but only temporarily.”

Have you noticed that the most important economic recovery policies of the Federal Reserve and the Obama Administration are designed around getting households to take on more debt? Read my recent Tierra Grande article “Dialing Down Debt” to see how far household debt is out of whack compared with the historical norm.

When will this country realize that the only path to long-term economic recovery is to increase consumption by increasing real household income? We must regroup and retrain our nation’s population to invent and manufacture real products that the world wants to buy.

Our leaders must improve domestic regulatory and tax policy while standing up forcefully to unfair foreign trade practices so that American producers are competitive in the global economy. We must create jobs through fully developing our natural resources for domestic consumption.

Engaging in monetary policy that produces short-term wealth effects and inflation won’t fix the problem. The solution lies with Congress and the American work ethic of households.

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