Bernanke Waits, Mop In Hand
Bloomberg reports on the new Fed chiefs approach to the housing bubble. “Federal Reserve Chairman Ben S. Bernanke, like his predecessor Alan Greenspan, doesn’t plan to get in the way of surging home or stock prices. Bernanke, staking out a key policy in his first month on the job, said yesterday at Princeton University that the central bank ‘doesn’t really have good instruments for addressing asset price bubbles should they exist, particularly if they are in one particular segment or another.’”
“Bernanke’s views on dealing with rising asset prices match those of Greenspan, who was faulted by some economists for allowing a stock-price bubble to inflate in the late 1990s and for letting U.S. home prices soar in recent years.”
“‘To use interest rates to try to puncture the housing bubble would be a disastrously bad idea, and Bernanke obviously agrees, because he’s not going to come close to doing that,’ said Alan Blinder, a former Fed vice chairman. He wrote a paper last year saying Greenspan may have been the ‘greatest central banker” ever.’”
“Blinder said the Greenspan-Bernanke approach to bubbles is ‘basically, you do nothing, and then the corollary to that is that you mop up after they burst to keep the financial system from taking a big fall.’ Bernanke’s hands-off approach has ‘been his position for years, since he was an academic,’ Blinder said.”
“U.S. home prices have risen 55 percent in the past five years. Sales of previously owned U.S. homes fell in December to the lowest level since March 2004, evidence the five-year housing boom may be coming to an end.”
“Bernanke in the past has said using interest rates to attack asset prices may damage the broader economy. ‘A much better approach for the Fed in dealing with problems of financial markets is from the microeconomic point of view,’ Bernanke said yesterday. ‘For example, we pay a lot of attention to the supervising of banks to make sure that they are taking sound policy, making sound loans.’”
“‘Bernanke is not inheriting the best of situations,’ Paul Volcker said in an interview after Bernanke’s speech. ‘How would you like to be responsible for an economy that’s dependent upon $700 billion of foreign money every year? I don’t know what I would do about it, but he’s going to have to do something about it sooner or later.’”
‘ Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School, said Bernanke’s approach at the Fed will be to “emphasize continuity, and frankly, that’s what the market wants.”
Long live the conundrum!
He’s going to need a big mop to clean up this mess. They might have to start handing out $2k debit cards again.
They tried handing out $2K in cash to Katrina victims. One guy managed to collect $46K, using 23 different stolen Social Security numbers.
I think they also wasted a bunch of money on fleetwood travel trailers. Just piss away money real fast and hope that fixes the problem.
Taken from The Economist, Feb 18th-24th 2006 edition:
‘The presidency — Not a good week
The Department of Homeland Security’s inspector-general mentioned $900m spent on 26,000 mobile homes for evacuees. Since “regulations prohibit using mobile homes in flood plains,” he said, they “cannot be used where most needed.” Indeed, nearly 11,000 are now “sinking in the mud” in Hope, Arkansas.’
Hope is William Jefferson Clinton’s home town, where there is apparently a fair amount of mud to sink in …
Perhaps Ben Bernanke consulted Colin Powell before taking on his challenging new position. There is little doubt about what advice Powell would have offered: “Pottery barn rules — you pop it, you bought it…”
Mopping is a much more politically pleasant activity than popping.
“Bernanke, staking out a key policy in his first month on the job, said yesterday at Princeton University that the central bank ‘doesn’t really have good instruments for addressing asset price bubbles should they exist, particularly if they are in one particular segment or another.”
It is funny how much energy Fed officials expend discussing asset price bubbles in one particular segment or another, despite their inability to foresee them or even to figure out in what segment they might lurk!
Translation; Ben will let the housing market crash and stand ready to protect the banking system. High consumer rates for lending and low bank rates.
Result; massive deflation as foriegn and domestic capital flows to Japan and to various offshore assets.
Robert,
Do you have (or recommend) a website where this kind of broader economic thought is developed in more detail and at greater length? Been reading your comments here and on other blogs for a while and apart from the fact that they’re consistently eyeopening, they always leave me wanting more; I’m no economist, but I can appreciate a well-laid-out commonsense argument, and I know I’m not alone here. Would love to see your insights put together in one place.
yes, I agree with ogivemeahome, would like to learn more about macroeconomics from Robert Cote or sites he recommends.
Sorry to burst your bubbles, but my impression is that Robert is not an economist. Robert, please correct me if I am wrong
Coherence and completeness are the only bonafides for any argument as far as I’m concerned. Seriously, Robert could ring up groceries for a living, I’d like to hear more of what he has to say.
Fair enough. “De Gustibus Non Es Disputandum.”
Or “Giove con avermi fatto dotto, mi fe’ dottore.”
I’ll 3rd the motion Mr. Cote. Your posts are intriguing.
For the Robert Cote fan base.
He has a blog. Click on his name and you get more R. Cote.
rgemonitor.com is great. They recently started charging to read some of the items, so I read it less. But the blogs of Roubini and Stetser are free as are many of the daily articles linked to. Morgan Stanley has blogs, such as Roach, that are very good.
General Glut is also good, but he’s been quiet lately as he teaches and awaits word on whether he will get tenure.
Through rgemonitor you can find other links, such as calculated risk.
You probably know some of these already.
I picked up on the bubble in 2003 after we returned to the NW after five years abroad and felt that the country had gone insane. We were very impressed by an Economist piece in May of 2003 that spoke of a bubble. At that point, I became fascinated with economics as this all seemed so strange–the economy in the NW in the doldrums but real estate going up. We decided to rent.
However, we cold have bought houses here for 350,000 then that now would go for 700,000……so we’re not feeling too smart!
The increased inventory is not happening in the NW.
Many thanks, I’ll follow up on these!
http://www.rgemonitor.com/component/option,com_newsfeeds/task,aggr/feedid,10001
Mentions AngryBear, The Big Picture, etc.
a bunch of econo blogs here.
This is interesting albeit not directly related. Not sure it was reposted here:
http://bighousingbubble.blogspot.com/
But it also echoes remarks made by President Bush during a Q&A at JK Moving & Storage in Sterling, Virginia on January 19, 2006:
QUESTION… I guess my question is, as the consequence of this great housing boom has increased the cost of housing so much not only in this area, but throughout the country, it’s very difficult for me to envision my kids being able to afford a home, or even the workforce that drives much of our school systems and our police and (inaudible). How do you see the federal government helping this workforce, (inaudible) — to be able to afford housing close to where their jobs are?
THE PRESIDENT: Markets adjust, and the role of the government is to make sure the market is able to adjust in a way that is not precipitous and disruptive. When you have wage and price controls, for example, in history, it has tended to not allow the market to adjust in a smooth function, a smooth way. It doesn’t function properly. And, therefore, the consequences of government trying to either manage price or demand is very severe.
So to answer your question, one role of the government is to make sure that markets are given the flexibility to adjust in a way that doesn’t cause major disruption. If houses get too expensive, people will stop buying them, which will cause people to adjust their spending habits.
Secondly, setting of interest rates affects your business. You’ll be happy to hear that the White House doesn’t set interest rates. The Federal Reserve Board sets interest rates. I get to name the Chairman; I named a good guy in Ben Bernanke. But it’s their job to be independent from the political process and look at market forces — in all aspects of our economy — to determine the interest rate to be set. Obviously, they look at inflation, consumer demand, et cetera.
So to answer your question, the simple answer is, let the market function properly. Let the market function properly. I guarantee that your kind of question has been asked throughout the history of homebuilding — you know, prices for my homes are getting bid up so high that I’m afraid I’m not going to have any consumers — or my kid — and yet, things cycle. That’s just the way it works. Economies should cycle. We just don’t want the cycles to be so severe that it gets disruptive so that you get thrown out of business, for example, or somebody gets thrown out of work.
Au contrair, he will keep raising rates to attract inflows. I hope he raises the Fed rates to at least 8%. My savings rates suck with (real) inflation cranking along at over 7%. After taxes I’m going backward.
“‘Bernanke is not inheriting the best of situations,’ Paul Volcker said in an interview after Bernanke’s speech. ‘How would you like to be responsible for an economy that’s dependent upon $700 billion of foreign money every year? I don’t know what I would do about it, but he’s going to have to do something about it sooner or later.’”
Paul Volcker was in a similar boat when he took over at the Fed in 1979, after a period of rampant inflation in housing and commodities prices. I cannot recall exactly what he used, but it was not a pin … oh yeah, he used a shoulder-launched surface-to-air missile and shot that balloon right down out of the sky!
Volcker seems to be the only one making comments that would indicate he is living on the same planet as the rest of us. Everyone else is too scared of rocking the boat to say anything that could possibly be construed as negative.
“Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks — call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.” Paul Volcker, 2005
In other words, when the balloon floaters and carnival barkers tell us things are wonderful, we know they’re pissing on your legs and telling us it’s raining.
Does anyone out there see any evidence of this actually happening on the ground? I know advice has been issued regarding subprime loans, but you still hear stories of people with low incomes buying 800,000 townhomes here in NoVa and Ca.
This group upside down with big resetting mortgages is going to be one of the hardest hit if and when the bubble does pop.
novasold
The Federal regulators have been AWOL on the whole mess. Didn’t the Washington Times just run a story where originators basically said ‘we raise our money on Wall Street and we’re not subject to the OCC regs.’
As I look over the ‘price reduced’ ads in the local paper and all the ‘brand new’ homes for rent at probably half their carrying value, I wonder if mop-holder Ben will have such a great tenure at the Fed.
You are right.
Recently there have been bloggers in other areas (politics) who have kept journalists honest.
With the open flow of internet information, these blogs are here for all to reflect on when the SHTF.
This blog has been a tremendous learning tool for me and helped me understand what has been really going on in a market that based on ground experience in my ex-neighborhood I could not explain.
Thanks Ben. Keep doing what you are doing. You and other bloggers may be keeping the media and banks a little bit more honest. Note how the coverage of the home market has changed in the last six months. I wonder what it will be like six months from now after the spring and summer selling season.
novasold
The Fed has paid zero attention to supervising banks in this run-up. How anyone can equate zero down, interest-only, no doc loans with sound lending practices is beyond me. And for all the “let the market regulate itself” nuts out there - that’s fine except when it runs so afoul of rationale practices to eventually require a bailout, the likes we’ve never seen. If I have to work my ass off to pay taxes so that they can be shifted over to bail out some idiotic fools (bankrupt individuals or banks), I’m going to go ballistic, and hopefully, I’m not alone.
I’m all for market forces, but Moodys says we taxpayersare backing up these mortgages. Do we?
Greenprint was the “greatest central banker” ever? Sure, whatever you say, Mr. Blinder. I suspect history will not be so generous to Alan.
Did anyone catch Sunday Morning on CBS? They had a segment that discussed consumer debt in detail, as well as mortgage debt. And get this: they had a quick statement by the author of “Empire of Debt” (Bill Bonner?). They closed out the segment with another expert mentioning the possibility of a “banking crisis” should too many loans go bad. Wow, this in the mainstream media? A few months ago, anyone making these statements would have been written off as alarmist.
The pendulum has swung so far with regard to the American citizens appetite for debt, it will surely swing back the other way. I think before long we will see lots of seminars, books, and ads on how to get out of debt. Debt will be seen for the albatross that it is. We may already be seeing some shifts in that regard.
Missed the show but I did see oprah friday where they were talking about american debt. Most people are living way beyond their means. It will catch up to us sooner than later.
Yeah, I saw that, too. Lots of talk regarding the negative savings rate and a mention of people draining the housing ATM.
Question for those who may know:
The lending institutions nowadays package mortgages for investors to free up cash to make more loans, correct? If a large number of homeowners default on their loans in a short period of time, would it not be these investors who are most hurt? And, who might these investors be? (Individuals? Corporations? Foreign National banks?) I really am curious as to how it will play out, and how much public money will be needed to bail out the system - not that we have the cash to spare like Japan of old, right?
Sorry OT (again!) but this data is begging to be shared with a wide audience — a link to SD MLS data from Jan 05 - Jan 06 which shows the numbers of sales and new listings.
http://sandicor.com/statistics/stats2006/01statistics.html
If your browser can handle .pdf files, click on the Monthly Sales link, where you will discover the following rather convincing evidence that the San Diego housing bubble has popped:
1) January 06 had 8428 new listings, which was greater than the highest for any month in 2005 (8118 new listings in August 05);
2) January 06 had only 1876 closed sales, which was far below the worst month in 2005 (2297 in January 05);
3) All of 2005 saw 81,500 new listings but only 37,885 sales, which leaves a net 43,615 which were either withdrawn or added to the growing mountain of inventory.
Thanks, Patrick!
Dividing the total dollar sales volume for Jan ‘05 and Jan ‘06 by the number of sales in each respective month, you get the same exact price $603k. Average prices are apparently exactly flat in SD y/y. I would expect declining y/y prices are imminent.
Wow, look at the ratio or percentage of sales to listings…down to 22% sales to listings. I don’t follow these stats but looks bad. Woo Woo the train is slowing down. Now if only NJ could hurry up and get with the program and experience the same.
What’s great for us looking to buy homes is we don’t need interest rates to rise for housing to pop. Between flippers and 1st time buyers with 2 year ARMs, etc…, a lack of appreciation is all we need for the first chink in the armor to appear. And as many here can attest, that’s already happening. Once the bottom rung has to bail at a loss (can’t keep up on 2 mortgages - especially with no appreciation), or hand back their keys to the bank (1st time buyers with insanely dumb loans), this thing is on like Donkey Kong. No one left to move up to McMansions and prices start dropping on those. Then the fire sale begins. All without much of a move in interest rates.
Bernanke is like a fireman standing outside a burning house with a hose - letting it burn but just making sure it doesn’t touch anything around it.
This is gonna be beautiful.
I’m imagining level three. Once you release all of the pins holding up the Kong… they all fall down. (But who gets the princess?)
How long before lenders will only be willing to loan on standard terms, with a sizable down, to QUALIFIED buyers, due to the fact that RE prices are falling.
No, we definitely don’t need rising rates, tightened lending standard will light a fire under this thing.
Deb,
You are right. I don’t know when or if they ever will. If they did tighten their standards they might go out of business. Maybe whoever is buying the debt will require them to shape up. Not sure if the feds can regulate them too much if money is private or from international sources.
I think we can anticipate a whole bunch of these lenders going out of business in any case, no? Back in the day, if you wanted a home loan, didn’t you have to go to a bank? These suckers are up and running only because they wanted a slice of the pie.
Yep,
The SECOND the lenders realize that they won’t get their money back from bad loans (i.e. when an extended downturn in prices is apparent, they’ll pull in the reins faster than you can say “Seabiscuit.”
“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”
Mark Twain
We will probably see a lot of lenders close up shop and run for the hills with their bags of money. I’m so tired of listening to all the bs lending commercials. I cannot watch a show without seeing one, though lately I’ve noticed they are slowing.
This housing bubble is much like a controlled burn ignited by holding Fed Funds rates at negative real levels for a protracted period of time. Hopefully for Ben Bernanke, the fire he is watching while he holds the unused firehose in hand will not turn out like the May 2000 controlled burn in Los Alamos did:
http://archives.cnn.com/2000/US/05/11/nmex.fires.06/
WEll at least that fire was an “accident”. Ben might just have to hop back in his helicopter and fight fire.
There isn’t anything Bernanke can do about it anyway. The RE prices will fall whether he raises rates, keeps them the same, or lowers them. He is like the fireman standing outside a burning house without a hose. And the damage from this fire WILL spread to other areas of the economy.
The Feds have orchestrated a sub-rosa bailout of Fannie Mae over the past 18 months, thanks to the support of foreign central banks (primarily Japan and China.)
As Fannie Mae has liquidated its portfolio—which could have caused a credit meltdown in the mortgage market and likely the stock market as well—FCBs (foreign central banks) have bought nearly every dollar of MBS that Fannie has liquidated.
This trend has only gotten stronger. FCBs have added $79B in mortgage paper just since Aug05. They now hold almost $500 billion in U.S. mortgage paper, the equivalent of over 2 million 100% mortgages on the median U.S. home. In reality, they now likely hold nearly 4 million U.S. mortgages. The Bank of China now holds almost $1 trillion in U.S. debt (treasuries and mortgages). You can thank shoppers at WalMart for that.
What comes next? Many believe that China will likely not be interested in adding USD-denominated debt much beyond $1 trillion. So the end game is near. US banks have no interest in buying this stuff nor do US investors. So when the FCBs pull back, as they are soon likely to do, there are only two scenarios: 1) a credit pullback or implosion; 2) the Fed will have to “monetize” this debt by printing money and buying it themselves. This will lead to higher interest rates, inflation and/or a fall in the USD. Either scenario is not a positive development.
The mortgage game is nearly over. The global mortgage circle jerk has just about run its course.
All data from Wallstreetexaminer.com
“Many believe that China will likely not be interested in adding USD-denominated debt much beyond $1 trillion.”
Purchasing $1 trillion of our debt is very generous of them. How come our Congress is so ungrateful?
Should also point out that the folks at the wallstreetexaminer.com say not to look at interest rates for clues, but at general mortgage and credit liquidity. When liquidity dries up—whether due to FCBs pulling back on their mortgage buying binge or for other reasons—the U.S. housing market is toast. Interest rates matter, but liquidity matters more. Where liquidity goes, housing follows.
When liquiditiy dries up, interest rates go up.
Global credit market dries up:
http://business.telegraph.co.uk/money/main.jhtml?xml=/money/2006/02/24/cccredit24.xml&menuId=242&sSheet=/money/2006/02/24/ixcoms.html
‘The “carry trade” - as it is known - is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1pc in Switzerland, to re-lend anywhere in the world that offers higher yields, whether Argentine notes or US mortgage securities.’
Sounds like the hedge fund bubble is going to go away with the housing bubble. Hedgefundanalyst, would you care to comment?
Brad, thanks for the link - very informative.
The Federal Reserve’s main objective is to provide liquidity and to keep thebanks solvent, not individuals. Helicopter Ben is beholden to Wall Street, not main street. WHEN the music stops playing, the taxpayers (us), will be left holding the bag, not the banks or GSE’s.
Read the report on the investigation of FNMA. Why isn’t Raines and his cronies being dragged in front of Congress or receiving in subpeonas like every other corporate crook
Raines was peremptorily exonerated in Rudman’s report. Congressmen have quid pro quo arrangements which must be honored if they hope to receive future campaign contributions from Fannie Mae.
“Many believe that China will likely not be interested in adding USD-denominated debt much beyond $1 trillion.”
I’ve too have heard this said, but have never been pointed to a site quoting remarks from the Chinese Central Bank. Does anyone have any real evidence that the Chinese are going to stop buying our debt?
I think the Chinese realize if they stop buying U.S. debt then they should also plan on closing their factories that make crap that shopaholic Americans buy on credit (debt) which the Chinese buy.
I agree at some point it has to end, but I wouldn’t be looking at the Chinese shooting themselves in the foot. They may slowly reduce their U.S. debt purchasing levels as a way to help them slow their own overheated economy, but it’s not something that will happen overnight IMHO.
China is shifting the decision to businesses and individuals that China’s central bank won’t need to keep buying US bonds any more, as long as their dollars are spent overseas through other channels:
China to relax control on investment in overseas financial markets
who cares about core if the broadest measure of inflation is going up?
such inflation in home prices reduces the value of earnings and saving and is equivalent to stealing money through inflation. Bernanke / Greenspan Fed cannot continue to fool people through their loose mopup monetary policies every time asset values decline. Some suggest inflation facilitated Hitler’s coming to power in Germany during early 20th century. bad things happen when people realize inflation has reduced their hard earned savings to half or less.
The Economist has a nice archival piece from 1999 on this topic:
“The origins of the hyperinflation lay in the war, and the readiness of Germany’s legislature to let the authorities suspend the individual’s right to convert banknotes into gold. The central bank was also authorised to use government and commercial paper as part of the reserves it was required to hold against newly issued notes. This freed the government to finance the war by running the printing presses, with the usual effect: prices rose. By the end of 1918 the mark had fallen more than 50% against the dollar.”
http://tinyurl.com/gc2jf
We have a war on, high trade and fiscal deficits, and a new Fed chair who says the govt has a printing press which can be used to fend off deflation if necessary.
Humh…
I guess the main test for Bernarke’s credibility will be the upcoming rate hike that will place the Fed fund rate above the yield curve. It will be interesting to see how that will play out.