The Housing Bubble

A weekend topic starting with the Dallas Morning News. “For Valentine’s Day, Danielle DiMartino Booth sent Janet Yellen and the ruling cohort at the nation’s central bank a caustic forget-me-not. DiMartino Booth, who advised Richard Fisher about the financial markets during her nine years at the Federal Reserve Bank of Dallas, has written ‘Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America.’ The book is a scathing dissection of what she says led up to the financial crisis of 2008 and the ensuing easy money policies that she believes still threaten the country’s economic future.”

“‘This is not a wonkish Ph.D. dissertation,’ says DiMartino Booth, the 46-year-old founder and president of Money Strong LLC in Dallas. ‘The last chapter provides a blueprint of how we can go about fixing the Fed so that it’s an institution that doesn’t just benefit Wall Street but also Main Street and everybody in between.’”

“One of her main criticisms about the Fed is that it’s run by a bloated pack of 1,000 economists. A spokeswoman for the Federal Reserve Board says the actual numbers are 300 economists at the board level and 300-plus at the regional banks.”

“Shortly after 9/11, she made her way to Dallas to be with her boyfriend and now husband, John Booth. She became a daily financial columnist under her maiden name for The Dallas Morning News, where she sounded early and repeated warnings of an impending disastrous housing debt debacle. Some thought she was Chicken Little.”

“One point of departure is DiMartino Booth’s highly critical view of Yellen as a free-spending ‘Keynesian on steroids’ who lacks the experience to oversee the nation’s banking system.”

“In the last chapter of Fed Up, Danielle DiMartino Booth gives her strategy for retooling and rearming the Federal Reserve. Among her bullet points: Congress should allow the Fed to focus solely on price stability and inflation and not worry about maximizing employment. Permanent monetary policy voting rights should be given to all district bank presidents, not just the New York Fed. The Fed’s century-old map of districts should be redrawn to better reflect the economic engine of the West, including Texas.”

“Set more realistic term limits (currently at 14 years) for Fed governors. Cut the number of Ph.D’s among the leadership and staff to make way for more business people on the receiving end of Fed policy and to hire brilliant supervisors and examiners to keep Wall Street giant investment firms in check. Weak financial institutions should be allowed to naturally self-destruct.”

From MarketWatch. “Danielle DiMartino Booth, author of ‘Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America,’ attacks the culture of the Fed, starting from the bottom up. She takes on the research staffs of elite, Ph.D. economists — ‘the MIT mafia’ — who are married to their mathematical models and focused on publishing in peer-reviewed journals. She exposes the institutional groupthink — ‘groupstink,’ she calls it — and disdain for dissenting views. And she reserves her most strident criticism for those at the very top.”

“The author arrived at the Dallas Fed in 2006 after a tour on Wall Street and a stint as a financial columnist for the Dallas Morning News. In her columns, DiMartino Booth had warned about lax mortgage-lending standards, a housing bubble and escalating systemic risk. Once ensconced at the Fed, she was left to wonder why so many ‘highly educated and well-paid economists’ were ‘oblivious as the worst financial crisis since the Great Depression was about to break over their heads.’ (One of the main reasons is the Fed’s reliance on econometric models that don’t include anything related to the financial system, such as debt or credit.)”

“It wasn’t just the staff economists who were blind to what was going on in the real world. Neither former Fed chairman Alan Greenspan, who can boast of two bubbles on his watch, nor his successor Ben Bernanke saw the train wreck coming.”

“Janet Yellen, the current Fed chairwoman, is subject to withering criticism in the book. From 2004-2010, Yellen was president of the San Francisco Fed, whose district encompasses nine Western states and was ground zero for the housing bubble and subsequent bust. DiMartino Booth portrays Yellen as an uber-dove and devout Keynesian, someone who was ‘oblivious as the housing market in her region imploded on multiple fronts.’”

“The author advocates greater diversity at the Fed: specifically, more staffers with actual business experience and fewer ivory-tower types. She would like to see an increased focus on systemic risk. And she wants Congress to release the Fed from its dual mandate — stable prices and maximum employment — so it can focus solely on price stability.”

“Bernanke arrived at the Fed as an advocate of inflation targeting. He used to say that price stability was an end in itself and a means to an end (maximum employment). The Fed even adopted an explicit 2% inflation target on his watch.”

“The nation learned the hard way that price stability is a necessary but not a sufficient condition for economic and financial stability. The U.S. experienced back-to-back asset bubbles — in technology stocks and in residential real estate — during a period referred to as the ‘Great Moderation.’ So price stability alone is no guarantee of Nirvana.”

“Specific policy recommendations comprise a few pages at the end of ‘Fed Up.’ The issues themselves, such as whether the Fed is spawning a ‘never-ending, self-reinforcing cycle of speculation and correction’ with its unconventional policies, form the basis for the book. And hopefully the basis for self-reflection and change at the Fed.”