Tuesday, November 26, 2013
Yet another reason to scrap Help to Sell
Higher asset prices increase the value of firmsÃ¢Â€Â™ collateral, strengthen banksÃ¢Â€Â™ balance sheets, and increase householdsÃ¢Â€Â™ wealth. These considerations perhaps motivated the Federal ReserveÃ¢Â€Â™s intervention to support the housing market. However, higher housing prices may also lead banks to reallocate their portfolios from commercial and industrial loans to real-estate loans. This column presents the first evidence on this crowding-out effect. When housing prices increase, banks on average reduce commercial lending and increase interest rates, leading related firms to cut back on investment.