Bloomberg View

Bloomberg View: Learning from Iran (Yep, Iran); the Fed's Plan to Jump-Start Housing


How to Kick the Gas Subsidy Habit

In 2010 the value of all fossil-fuel subsidies, for both production and consumption, was roughly $500 billion. On the consumption side, 37 countries spent $409 billion underwriting their citizens’ fuel purchases, according to the International Energy Agency. You can fill up a 32-gallon Hummer for about $3 in Venezuela.

The IEA, an independent body formed after the oil shocks of the 1970s, estimates that only 8 percent of that $409 billion went to the bottom-income quintile. Moreover, such government funding sucks up money that could be used to help the poor in other ways: Venezuela devotes at least 6 percent of its gross domestic product to fuel subsidies, about double its education budget; in Indonesia that amount is around 4 percent; the $6 billion that Nigeria has been spending to keep fuel prices low is three times its health budget.

In addition to freeing up hundreds of billions of dollars for more productive uses, unwinding all consumption subsidies by 2020 would reduce demand for energy by 4.1 percent and carbon dioxide emissions by 4.7 percent, the IEA says.

There’s a model for how to get your country off the crack cocaine of fuel subsides: Iran. Whatever the conduct of President Mahmoud Ahmadinejad’s government in other realms, its fuel-subsidy reforms in late 2010 are impressive. Legislative debate began almost two years before the changes went into effect; officials, academics, and community leaders ran an extensive public awareness campaign that included sending households mock bills showing the true cost of their electricity. More important, the reforms included a clear benefit to Iranians: direct cash payments to more than 80 percent of the population, paid out before the changes took effect. In the case of the poorest of the poor, the sums amounted to more than half their monthly cash income, which helped to insulate the program from political criticism.

In 2009 the Group of 20, whose members encompass big oil exporters and importers, pledged to phase out “inefficient fossil-fuel subsidies that encourage wasteful consumption.” One way to ensure that this goal is met would be for the Organization for Economic Cooperation and Development to team up with the United Nations Development Programme to compile best practices from Iran and other countries, as well as from the work being done by an alphabet soup of other groups (OPEC, the IEA, the World Bank, and its regional cousins).

The G-20 has so far deferred defining “inefficient” subsidies and “wasteful consumption.” Here’s one example: the tens of billions of dollars a year in foregone fuel taxes associated with diesel for agriculture, fisheries, and other “off-road” uses, mostly as a result of exempting them from excise levies. Tax that fuel, and farmers and fishing fleets would have more reason to be energy-efficient, and we’d have cleaner air and water in the bargain.

 

Urging Congress to Do More for Housing

In an unusual step, the Federal Reserve sent a white paper to congressional committees on Jan. 4, urging them to look again at what ails the U.S. housing market. More can be done, the Fed says, to help it revive.

Good advice. Housing is where the recession started, and the Fed’s paper underlines the scale of the problem. The decline in U.S. house prices has wiped out a staggering $7 trillion in home equity. The ratio of housing wealth to disposable income has crashed from 140 percent at its peak to 55 percent, the lowest since the figures began to be collected in the 1950s. The number of “underwater” mortgages has grown to 12 million: More than 1 in 5 homeowners owe more than the property is worth. It’s surprising the economy is making any headway at all into a gale of this force.

The Fed says there are no easy answers, but it makes several suggestions that Congress should take up. The first is to encourage conversions from owner-occupation to rental. The rental market has strengthened lately: Rents are up and vacancies down. A faster rate of conversions would keep rents in check and relieve the pressure of unsold homes on house prices. Fannie Mae (FNMA), Freddie Mac (FMCC), and the Federal Housing Administration account for about half the inventory of foreclosed properties. Many of these, according to Fed research, are viable as rentals. A government-sponsored foreclosure-to-rental program aimed at clearing away regulatory hurdles would make a big difference.

A second idea is to encourage refinancings. The Administration tweaked an existing scheme—the Home Affordable Refinance Program (HARP)—in October, easing some of the earlier restrictions on eligibility. The Fed is correct that more can be done.

One example involves the fees lenders pay to Fannie and Freddie for supposedly taking on new risks when loans to distressed borrowers are refinanced. These charges could be cut further or eliminated, even though Congress just voted to push them back up to help pay for the payroll-tax extension.

Borrowers with high loan-to-value ratios and mortgages not guaranteed by Fannie and Freddie get no help from HARP or any other scheme. Fannie and Freddie should be encouraged to back refinancing of these loans. Unlike the fee-elimination proposal, this would increase credit risk on the agencies’ books, but limiting the help to borrowers who meet underwriting standards and are current on repayments would mitigate the problem.

Potentially, this is a big deal. The Fed says as many as 2 million borrowers would meet HARP standards for assistance except for the fact that their loans aren’t guaranteed by Fannie or Freddie.

Four years into the worst housing slump in 70 years, it is shameful that steps such as these are still being talked about but not urgently implemented.

To read Jonathan Alter on the White House shakeup and William D. Cohan on the Street’s arbitration con, go to: Bloomberg.com/view.


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Companies Mentioned

  • FNMA
    (Federal National Mortgage Association)
    • $4.18 USD
    • -0.05
    • -1.2%
  • FMCC
    (Federal Home Loan Mortgage Corp)
    • $4.17 USD
    • -0.01
    • -0.24%
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