No ‘Greenspan Put’ For The Housing Bubble: Kohn
These Fed comments have been posted in the comments, but just for the record. “The Federal Reserve has no intention of preserving all of the recent gains in home price values, said Federal Reserve board governor Donald Kohn on Thursday. If real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,’ Kohn said in a speech.”
“In his remarks, Kohn attacked the popular ‘Greenspan put’ theory that Fed policy would always protect investors from sharp asset market drops while doing nothing to restrain these markets when prices rise. ‘This argument strikes me as a misreading of history,’ Kohn said. ‘Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk,’ he said.”
“‘Whatever might have once been thought about the existence of a ‘Greenspan put,’ stock market, investors could not have endured the experience of the last five years in the United States and concluded that they were hedged on the downside by asymmetric monetary policy,’ Kohn said.”
“‘The same consideration apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode. Homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,’ Kohn said.”
“‘Our actions will continue to be keyed to macroeconomic stability, not the stability of asset prices themselves,’ Kohn said.”
Yeah, right. Kohn is just a jawbone.
Did someone just take the punchbowl away?
Yikes. The speculators must be scared if they are smart enough and knowledgeable enough to understand what Mr. Kohn said. Wait, if they are actually smart enough and knowledgable enough they would have sold last fall or summer.
David
Bubble Meter Blog
Should never have kept rates so low for so long.
Shame.
it had to be done to dilute the massive overspending over the past 5 years.
Hey, wait, were are still overspending. Uh oh.
Dang, should be “we are still overspending”. Sigh.
“We’re” is ok. It’s “its” vs. “it’s” that’ll drive you crazy!
We are? Links?
Thank you.
Oh, you are a funny one, you are…
http://tinyurl.com/ej9sz
“Senate continued debate on a $2.8 trillion budget blueprint for the upcoming fiscal year that would produce a $359 billion deficit for the fiscal year beginning Oct. 1.”
Oh, for the days of gridlock…the current porkers give drunken sailors a bad name.
That would be FY2007. I’m not aware of the monthly current account trending up or down.
I’m not talking trending up or down, I’m talking overspending. Leave me alone, “I’ve been burned by you before”.
Kinda makes one long for Bubba and Rubin…
Amen.
If our treasury can’t meet it’s budget no way will an average recent homeowner.
March 16, 2006
Treasury Postpones Auction Announcement
The announcement of 13-week and 26-week bills to be auctioned March 20, 2006 has been postponed pending action in Congress on legislation increasing the debt ceiling.
Wow. We haven’t made enough on the last two months’ auctions to remain solvent anyway, so this is fascinating (and unsettling) news. You know, if I were a cynical and skeptical kind of guy - and I am by training, experience and observation - I would say the auction has been postponed past the March 28, 2006 Fed meeting so that the Fed can bump interest rates at that meeting, then the bills can be auctioned at the higher interest rate and we can get bidding up and actually auction off enough debt to keep paying the bills. Of course, if that were true, it would mean that the appetite of foreign investors and carry traders is finally waning, which has absolutely dire implications for the US credit-based economy and for fututre interest rate hikes, etc.
Please ignore typo in “future” above and also review Morgan Stanley’s take on the debt situation, including “extraordinary” measures to avoid default (read raiding the pension fund again): http://www.morganstanley.com/GEFdata/digests/20020618-tue.html
Highlight: in one scenario “…the Treasury would be forced to utilize cash management bills as an interim financing vehicle and possibly employ another round of extraordinary measures to get around the debt ceiling constraints. This would be aimed at: 1) preventing a debt default when the outstanding 2 and 5-year notes mature on July 1, and 2) allowing them to make a large ($22 billion) payment to Social Security beneficiaries on July 3. Such a scenario might look similar to the one that played out during the 1995-96 debt-ceiling debacle.”
Debt ceiling raised to $9trillion…$30k for every man, woman, and child in the country.
So how come when the bank asked you to fill out an asset and liability statement for a loan, and you got, say a family of 4, how come that $120k FED debt isn’t stuck in the liability column?
WTF-An an Amercian taxpayer you’ve borrowed it.
If you owe the IRS the lenders sure in hell want to know about that debt.
Might get the sheep in this country to understand just where their political rep’s have put them.
The loan industry needs a new set of accounting and disclosure rules.
Hey folks-guess what? YOU’RE BROKE!!!!
Kind of makes you rethink what you think of “Ross Perot”, eh? OK, maybe not, but he at least got the country talking about the defecit.
Before Ross Perot there was Paul Tsongas, candidate for the Democratic nomination for President. I remember him focusing on Federal spending, using the ATM metaphor and stating that his party ignored how the money dispensed got there.
Are there any serious fiscal conservatives other than Romney running for 2008? Isittrue that he not only salvaged the SLC Olympics, but has created a surplus in Mass?
wow if it gets too bad, you can always apply to become a citizen of another country say with a lower tax rate (South America, Philippines, etc) and then renounce your US citizenship and move = LOWER TAXES!! =)
Of course this news will be on the back page of the LA Times Business section as well as with most other newspapers. On the other hand if Kohn stated they would support home prices it would make FRONT page news.
All else being equal, interest rates are higher now than they would be were real estate valuations less lofty…
I guess it’s this guy’s turn for Stupid Fed Governor Pronouncement of the Week. If real estate were “less lofty” today, then interest rates would be lower today as well? Huh?
Let’s pretend that we understand cause and effect — real estate prices do not influence interest rate. That said, let’s also pretend that we understand basic economics — anybody with a pulse knows that lower interest rate are what blew up the bubble.
And what’s this about “high(er) interest rates” anyway? 4.75% for a ten-year bond? We’re still only a percent or so away from the lowest home interest rates in the past fifty years. Maybe he’s trying to pretend that they’re tightening short-term rates to address the real estate bubble, but that’s like the bartender telling you that your pints are now 25c instead of 20c.
I interpreted this statement to mean that they raised interest rates in order to bring down home prices.
so Kohn is saying they are targeting home prices????!!!
yes, that is what the Fed man said. That’s the only plausible interpretation. The Fed is working to puncture the bubble without torching the economy. All the talk about Helicopter Ben doesnt take into account who his constituency is. People who have money dont like it to get diluted.
The last time the Fed had a Chairman who failed to grasp this point (Miller), he enjoyed maybe the shortest tenure of anyone who has ever occupied the position…
Comment by cabinbound
That said, let’s also pretend that we understand basic economics — anybody with a pulse knows that lower interest rate are what blew up the bubble.
I think that much more important that the actual low interest rate level is that rise in easy financing through exotic mortgages. These are new birds. The Fed has been slow to use regulator persuasion to clamp down on this.
Speculating on RE is no different from speculating on stocks or gambling in Vegas. If the gain is taxable, then the loss is deductible. That’s the most the Fed can do. Why should the Fed care about anyone’s loss?
A loss on the sale of your house is not deductible. That’s in the Introduction of “IRS Publication 523 — Selling Your Home”.
The loss from selling your primary home is not deductible, because the gain within $500K is not taxable. But I remeber I read it somewhere that the gain from your second home is taxable and therefore the loss from it is deductible. That’s why I thought it’s fair.
Correction: Gains up to $250K (single, $500K married) on RE for your primary house in which you’ve lived at least 2 of the last 5 years, is FULLY TAX -FREE.
Assymetrically, though, even a $1 loss on your primary residence, is FULLY NOT-DEDUCTIBLE.
You get tax benefits of losses only on rental properties, not your primary residence.
Thanks for the clarification.
So rent it out for two years before selling.
I think you need to rent it out 3 years (and a day to be safe). Isn’t it 2 out of 5 to qualify for the $250K/$500K exclusion? So wouldn’t it be 3 years to not NOT qualify, and be clasified as a rental sale? Forget it, it’s probably best to talk to a tax guy/gal.
NO WAY….You cant rent and get the exclusion!!!!
The home has to be owner occupied (you have to live there). You cant own 5 homes and rent them all out, then sell them and get the exclusion for all 5.
Not tax advice. See your CPA to be sure.
5 years, not 5 homes.
I love how the Feds cover their butts. Kohn is loudly repeating what Poole said the other day. They insist there is no way of knowing of bubbles in advance but if there was, you are on your own chumps. We don’t take any responsibility for encouraging any speculation because we lowered interest rates, nada, zero, zilch, zip.
While I have to admit I do think the ultimate responsibility lies with buyers who choose not to disagree with prices, I really wish the Fed were brought down a few notches.
Kohn was the only one I can remember really speaking up last April about this.
http://www.federalreserve.gov/BoardDocs/Speeches/2005/200504142/default.htm
While I have to admit I do think the ultimate responsibility lies with buyers who choose not to disagree with prices, I really wish the Fed were brought down a few notches.
The buyers, sellers, lenders, and appraisers are only doing what we expect them to do. But the Fed is supposed to oversee credit markets and lending, and they didn’t use their regulatory stick to beat back the extreme use of exotic mortgages. They could have had lower interest rates (to avoid a recession) and at the same time kept mortgage lending in check. But they didn’t.
This is OT but I find clicking on the AD links on this great Blog Doubly rewarding. It helps the Blog be financially sound while that is being paid by the real estate industrial complex.
Poetic justice?
I make a point to click the sponsors once a while ……after all we need them as much as they need us.
Is there a conflict of interest? I am confused. Please help me here.
If a home that is worth $1M now is sold $200K some time from now. What does it really mean to the economy? Nothing!
The seller loses $800K in gambling, but the buyer doesn’t over pay $800K, so whatever money those two parties have remain the same.
If the seller has to cut spending for the loss, the buyer now has more money to spend, so nothing is lost. Overall, it’s just a zero-sum game to begin with. Nothing is created or lost from whatever price a home is sold.
This country has spent more than 10 years in gambling and doing nothing productive. It’s time for a change.
>If a home that is worth $1M now is sold $200K some time from now. >What does it really mean to the economy? Nothing!
Think of all of the jobs that have been created to service this bubble (mortgage industry, re industry, homebuilders), as well as those that benefit from people using their equity as an ATM (auto industry, luxury items (”bling”), construction industry (kitchen remodels, landscaping, additions, swimming pools), etc.) Stagnant or falling prices shut off all of the CREDIT that was being used as REAL MONEY.
So when the credit dries up, all of this crazy excess comes to a stop. It was never real money to begin with; people were borrowing from the future to support their H2/boat/boob job habit. The problem comes when the future actually arrives. And it could get messy…
It WAS real money until it was devalued by the fed. Joe Shitforbrains hasn’t figured that out yet though.
“If a home that is worth $1M now is sold $200K some time from now. >What does it really mean to the economy? Nothing!”
This is true if the seller only owes 200k or less on the house. But if the seller bought the house with an 800K mortgage and defaults, then it does have an impact on the economy. 600K of value is lost somewhere down the line by someone or a group of people. Maybe it is spread out in the secondary market and if not too high of a percentage of these transactions happen it will not have a great impact, but if many homes lose value and default then the impact will be greater.
Also, if the person defaults on 600K, then 600K will have vanished from the money supply, and if enough money vanishes from the supply it will be deflationary. The Fed has been trying to inflate by encouraging low rates and easy money, but if the default rate becomes high enough it will have the opposite effect.
Exactly…your comments are right on and mimic how I try to explain all the “losses” from the stock market bubble. Technically speaking, there was no money “Lost” (i.e. it didn’t fall out of an airplane into the ocean) when the stock market bubble burst, it merely transferred hands along the way. My net worth went down as my stock holdings slid, but somewhere, somebody, gained off my losses. It’s just like you said with houses. Some people may lose (those who overbought, speculated, etc), but others will gain. The net amount is still balanced out (I know my theory makes sense, even though it is hard for me to understand how it all works out). The smart winners (when others are losing) will keep their mouths shut and not brag about their new gains (opposite the recent flippers, speculators, etc).
Look at it this way. Suppose I buy a house for $100K, and for simplicity, say I put no money down. Also suppose that, after a number of years, I get the house appraised and it comes in at $500K. Wow, I say to myself, Frank next door did a cash out refinance on his house, and now he has a H3 and a waverrunner. With my equity, I’ll bet I can get an H2 and a boat! So I take out $300K in equity and buy the bling. Why not, home prices always go up, right. And with falling interest rates, my payments are the same. Fast-forward a few years. Interest rates are at historical rock bottom. My house “value” has increased to $900K. And my H2 has a scratch, and my boat isn’t as cool Frank’s newly purchased boat. So I take out another loan on my house, but this time it’s at a variable rate (why not, with rates this low, it’s basicly “free money”). My payments are a quite a bit higher, but I’ll get raises in the future, this is America ™ after all. Fast forward to the next year. Home prices have flattened. Interest rates are rising. My payments are going up, quite a bit actually. And my raises are nowhere to be seen (this *is* America ™, after all). But I hang on. Maybe I can refinance and use some of that money to make some of my payments…
Fast forward the next year. Prices have fallen 10%-25%. Rates are up 1%-2%. I’m no longer buying new H2s. I’m no longer buying boats. And lo and behold, Frank isn’t either.
I’m under water on the house. I can’t keep up with the payments. I get my aunt to loan me some cash so I can sell at a loss to you and move to an apartment.
You buy it from me at a reduced price. In theory, money I “lost” in the deal is money you “gained”. But in reality, I HAD ALREADY SPENT THAT MONEY. That’s money that I will no longer spend on shiny new cars. Or boats. Or, in my situation, maybe not even beef or poultry; Mac & Cheese and Rice & Beans start looking real good. You’ve acquired a good house at a good price, but you’re also starting to hear news accounts of what happens to people like me, people that bet on real estate ALWAYS going up. You now know that short term, this isn’t always true, so you become more fiscally conservative. You pay off your mortgage instead of using it like “good debt”. You max out your 401K. You budget money for savings. Saving money suddenly looks more attractive because of the perceived safety and lure of rising interest rates. Needless to say, I (and a lot of other people) have got the “spend less, save more” religion as well.
The net effect of the huge run-up and the subsequent mini-collapse is that the economy gets a boost when Frank and I are buying our “bling” during the run-up, but takes a hit when Frank, you, I, and everyone else becomes fiscally conservative during the bust. And if the economy takes a hit, people will lose their jobs, which will cause people to fear for the future, and cause them to become even more fiscally conservative, which may weaken the economy even more, which…
Well, you get the idea.
Also, with reduced or stagnant house prices, the house speculators, amateur investors, and a good portion of people employed by the Real Estate Financial Complex (REs, contractors, mortgage brokers, etc.) will need to find other jobs, sending unemployment up, and putting downward pressure on wages.
The net effect may be tiny, or it may be great. But there will be an effect.
The Federal Reserve is a sham. Period. It should have never been allowed to come into existence in the first place. It absolutely defies the principles of banking that were held by the great men who founded this country. The sooner that we all wake up and realize this, the sooner we can all work to rid this country of this menace, The Federal Reserve.
Please go to this site and watch this movie trailer, and above all educate yourself about what The Fed is and what it does. It is flat out illegal and a huge detriment to the majority of people in this country.
http://www.freedomtofascism.com/
If you really think about it, banking is where the real money is made. They have direct pipes to the Fed. Easy money for the corrupt few. Always been this way though.
As long as we are the world currency, the fed can do what it wants, which is to “mop up” after a crisis. Any crisis. LTCM, Russian Default, 9/11, Katrina, stock market crash, and soon to be housing crash. Just pump, pump, pump. Then have some old wrinkled fool tell us in obfuscated language how our poridge is not too hot and not too cool. Of course there is a greenspan put. We need this clown Kohn to tell us not to rely on it to keep the facade that is the faith in our currency to continue.
so why don’t you buy the shares of banks, and shut up, if you believe in your theory so much
These remarks last year helped convince me it was a poor time to buy back in -
The Federal Reserve Board
Remarks by Governor Donald L. Kohn
At the 15th Annual Hyman P. Minsky Conference, The Levy Economics Institute of Bard College, Annandale-on-Hudson, New York
April 22, 2005
http://www.federalreserve.gov/BoardDocs/Speeches/2005/20050422/default.htm
Imbalances in the U.S. Economy
The growing current account deficit has been associated with a pronounced decline in the saving proclivities of both the private and public sectors. Over the past year, households have saved only about 1 percent of their after-tax income, compared with about 8 percent on average from 1950 to 2000.
…
Low interest rates have, in turn, been a major force driving the phenomenal run-up in residential real estate prices over the past few years, and the resultant boost to net worth must be one of the reasons households have felt comfortable directing so little of their current income to saving. However, whether low interest rates and other fundamental factors can fully explain the current lofty level of housing prices is the subject of substantial debate.
…
A second observation concerns the housing market, which you have already discussed. A couple of years ago I was fairly confident that the rise in real estate prices primarily reflected low interest rates, good growth in disposable income, and favorable demographics. Prices have gone up far enough since then relative to interest rates, rents, and incomes to raise questions; recent reports from professionals in the housing market suggest an increasing volume of transactions by investors, who (along with homeowners more generally) may be expecting the recent trend of price increases to continue. Even so, such a distortion would most likely unwind through a slow erosion of real house prices, rather than a sudden crash. Moreover, experience suggests that consumer spending would respond only gradually to any loss in wealth–an important consideration because a gradual adjustment in spending would give offsetting policy actions time to work. In any event, I take some comfort from the continuing disagreement among close students of the market about whether houses are overvalued, and, given the widespread press coverage of this issue, from my expectation that people should now be aware of the risks in the real estate market.
…
Still, complacency would be ill-advised. Although the odds seem favorable for an orderly adjustment, the current imbalances are large and–importantly for gauging risks–unusual from a historical perspective. Thus, we have little experience to call on in judging when and how they will be corrected. In such circumstances, we cannot rule out sudden shifts in expectations, whether or not they are unreasonable to begin with, and asset prices may change suddenly. Investors may recognize the unsustainability of some flows and prices, but believe they can adjust in advance of the market–as apparently many thought they could in the tech-stock bubble–and their reactions when prices move could add to volatility. Moreover, we cannot rule out governments engaging in unwise policies–policies that might undermine confidence or might hinder market adjustments and associated changes in asset prices.
…
But, in the same vein, we should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices, just as we were willing to keep rates unusually low as house prices rose rapidly. Nor should we hesitate to raise rates because higher rates mean higher debt-servicing burdens for the current account, the fiscal authority, or households. In my view, our role is to anticipate as best we can the macroeconomic effects of imbalances and their correction and to respond to unexpected changes in asset prices and spending propensities as they occur. It is through such actions that we aim to achieve our objective of economic stability.
>Even so, such a distortion would most likely unwind through a slow >erosion of real house prices, rather than a sudden crash.
Let them eat inflation.
>But, in the same vein, we should not hesitate to raise interest rates
>to contain inflation pressures just because it might set off a
>retrenchment in housing prices
Except if inflation gets too high, we’ll have to shoot housing in the head.
Question: What is a FOOL?
Answer:
Anyone who thinks that the NAR, the mortgage industry and the home builders industry won’t be conducting multi-million dollar lobbying campaigns to hold interest rates as low as possible.
Conclusion?
The people who benefit from high housing activity will be buying our Feds to keep interest rates low.
Actually, the Fed is not particularly susceptible to lobbying from the real estate industrial complex, or even Wall Street, for that matter. Their constituency is the commercial banking industry. That is the connection between the Fed, interest rates and inflation. Somebody who lends money needs to know that the currency with which they are repaid adequately compensates for the loan. So, the Fed will screw everyone in sight to ensure the health of the banking system, rest assured.
I wonder if there really is anybody that bought property in this hyper-inflated market thinking “Gee, I won’t have to worry ’cause Greenspan wants property values to stay high.” Somehow I don’t see that.
But, even if that is the case for some, to me that is more indicative of desperate greed combined with a lack of financial education that spurs such reckless speculation.
Ignore the man behind the curtain is what this fed “gov’na” is saying. Reality is greenspam and I am sure Bernanke too just open up the taps everytime there is a perceived crisis. Ewwww.. stock market crash. Just hold your positions, the fed will pump it back up. Took a few years, but it is. Same will be true of RE. Only thing fed is really afraid of is deflation, but we know how Bernanke would solve that.
Sad but true, the “Greenspan Put” is reality. I’m sure even the outrageous prices paid for real estate today will look cheap 10 years from now. It has to, the fed has to continue to inflate money supply over time. In many ways the old adage of “buy as much house as you can afford” works. Although I certainly wouldn’t be buying today. But that is a short term outlook.
Given what I just said, its hard to believe we put so much faith in these fed bankers. They really don’t seem much smarter than your average politician. Such is life with a fiat currency.
We can settle this bet in a years’ time. My money is on the Fed raising rates to keep the dollar as stable as possible. If they inflate like mad, the main beneficiaries are FBs. But bondholders get screwed in an environment of rapid inflation. If the foreign holders of treasury bonds stop buying more, let alone start dumping them, the projected pain of the FBs in a non-inflationary environment would be tiny in comparison.
That much said, the Fed may print a lot of cash if we approach deflationary conditions, if the FBs stop spending and recession looms. Japan has shown that kind of money-printing can occur without runaway inflation. I dont know if the BOJ policy would work in the USA, but the BOJ example is definitely on the radar.
Better 1990’s Japan than Weimar Germany, right? Tokyo’s still a pretty fun city, not like Berlin in the 1920s.
I think they don’t need to raise rates very high (which could ultimately down the road result in a Japanese type of fed rates). The fed and our government have done such a remarkable job of masking inflation thru statistics, there is no need to raise rates that high. Just keep telling people that inflation is low, our media doesn’t have time to check the facts.
I think the 10 and 30 year bonds will continue with their low yield until the fed signals they are done raising, then I think we will get the spikes in treasury yields, gold, and oil that should have happened years ago.
Really rather smart of that wrinkled old greenspan to continue to move rates at such a snails pace, it delays the big spike. If they were really smart, along with stopping M3, they should meet only half as many times, this way interest rates could continue to be raised 25 basis pts for another year and still not get anywhere.
This is a test post. I am getting database errors when I try posting on the previous topic. ignore.
deflation is illegal- OT but RE has only gone up 12% in Swz over the last few years- SWISS have the soundest currency and economy in the world
The fed will crush them.
California update: Change has come to Ventura County. The phrase “It’s different here.” has come and went. Prices are dropping. Inventory is up (633 total-Realtor.com today/480 end of December ‘05) and new home builders are dropping prices. Richmond American’s “Brentwood” has stopped building as far as I can see. Lots graded, some homes built, but no new ones untill the existing inventory is sold. The agent told us about the great deals we could have and how they have dropped prices. “To only 997k for 3br and 2,900k sqft! They have homes that are now “for sale” that people gave back after they were built. Saw a few this weekend. Lots of upgrades, but the buyers bolted. Current owners are selling out too. You should see this one block. Just about every other one is FOR SALE. Even new ones. Prices have dropped 300K from what I saw was the highest asking price last April. From 1.4 to 1.085. 4,400 sqft. The sky is falling. The sign out front stared “from the 900s” then in ‘05 “from the 1 millions” now, no numbers!
Renting and waiting.
Inventory for 93065-93063 only. Thousand Oaks is climbing higher every day too. Now about 900.
Thank you simi guy. Very Few posts cover Ventura County. Oxnard is supposed to be 55% overvalued.
Two times, 2 of my coworkers got mugged there 4-5 years back. I guess even those muggers are worth $500K.
Housing has been Good to bring crime rate down….Oh I got an Idea!
in Mish’s blog he has links to new home sales in texas, Ohio etc.
A nice article. I’m waiting for a similar list for ventura county.
By the way one more condo went on sale in my development 3BR-2B 479,900. how odd pricing? There two others(reduced listings) one at 472,500 , another 47500
91320 zip code.
http://www.foreclosure.com has atleast 20 units either foreclosure or tax lien on two streets!. Yucks!
I’m not sure if these stats are true or not!
Last sunday - one 2BR-1.5BA was having an open house, in a very cold weather!
“I’m sure even the outrageous prices paid for real estate today will look cheap 10 years from now. It has to, the fed has to continue to inflate money supply over time.”
Pray tell, how do you figure that this can be accomplished. There is no way that SSI, medicare, and fixed pensions could allow the expansion of housing rates to continue without throwing the elderly out into the streets. Plus, those that continue to build their retirement on a house of straw and ignore savings will be in more dire straights than those elderly of today.
its unfortunate but true. If you wait long enough, your house will be worth more than you paid for it. Any tangible asset held long enough is a great hedge against the only thing the federal reserve does and thats inflate the money supply. SSI, Medicare, etc can and most likely will be solved in the same way. Print money.
The politicians forget that the people we are letting into our country are non-tax paying. Best way would have been for the government 10-20 years ago to have implemented tax breaks and childcare services to encourage working (read taxpaying and educated) families to have children. Japan and Europe are in much worse shape, (Europe’s immigrants are mainly muslim and will eventually bring their governments with them). Japan will simply deflate.
Anyway through the power of the printing press (or if you will now via a simple press of a button) our government can and will ease their debt burden to pay for SS, Medicare and its now free prescriptions. Remember that only the elderly vote.
The politicians forget that the people we are letting into our country are non-tax paying. Best ….
So true! The bulk of the immigrants come from the countries where the tax compliance is very poor. They believe in NOT paying taxes by hiding incomes (usually they take up jobs with other immigrants or have small businesses), but are the first to use up the government hand outs. However, one good thing about these immigrants is that they work, provide services and help keep the costs down. Also, the bulk of them are peaceful..
Not true, I am an immigrant and pay seven figures a year in taxes. The problem is witht the goverment not inviting the right kind of immigrants and forcing them to stay illegal This makes them insecure as they can be deported at anytime and hence they don’t pay taxes and send all their savings home except for what lilltle they need for basic neccessities. The govt should do a better job of policing the borders but legalize everyone already here so they can pay taxes and contribute their share,
“its unfortunate but true. If you wait long enough, your house will be worth more than you paid for it. Any tangible asset held long enough is a great hedge against the only thing the federal reserve does and thats inflate the money supply. SSI, Medicare, etc can and most likely will be solved in the same way. Print money.”
I hear this argument over and over but exactly how is the Fed going to “print money?” The Fed does not just print money out of thin air and give it away. The money supply is created (yes, from thin air) through willing debtors. I don’t see how the Fed can go any farther than it already has with that approach; it can try to lower the interest rates to 0% like the Japanese, but who would buy our Treasuries? They were only able to lower the rates as much as they did the last few years because foreign banks were willing to purchase at low rates, and I doubt that the foreign banks will continue to buy for such low rates. Also, banks will not continue to give out easy credit when defaults rise no matter what the Fed does.
So exacty how is the Fed going to “print money, since they cannot keep rates low when market conditions cause the rates to rise?”
Are the banks of the Federal Reserve going to offer to buy up the other bank’s bad loans to keep things going? No, they are businesses themselves, NOT part of the government, and want to make a profit, not take a loss. During the 1930’s the Federal Reserve Banks only offered to buy up the very safest debt, and only at the bottom of the deflationary period.
“‘This argument strikes me as a misreading of history,’ Kohn said. ‘Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk,’ he said.”
Let’s consider a few historical episodes to test Kohn’s assertion:
1) Oct 19, 1987 Stock Market Crash
2) 1994 Mexican Peso Crash
3) 1997 Thai Baht Devaluation
4) 1998 LTCM Fiasco
5) Early 2000s US tech stock bust
6) 9/11/01 Attacks
I am sure I have missed any number of other crises, but I have a simple question: In how many of these crises over AGs tenure did the Fed fail to supply a sufficient amount of liquidity to the markets to bolster stock prices?
My guess: The Greenspan put batting average was 1.000. Hence we are stuck in a Fed-made Frankenstein monster of a conundrum.
AMEN. It’s ridiculous for the Fed to say “Who us? Flood the economy with liquidity at every single sign of trouble. We’re shocked … shocked … you would say that.”
The Fed is squarely behind the mania/bust/mania economy we’ve had for the past 10-15 year or so, and to say otherwise is patently ridiculous.
The fed has very little control over monetary policy. Between the Japanese and Chinese $2 trillion in US dollar debt instruments are owned.
If Japan or China wish for the housing ATM to stay open they merely kick up the price, pay more dollars, for US T bills effectively dumpiing dollars out of helicopters with Bernanke sitting there holding his tongue.
The plan should (have been) be to have the Chinese and Japanese speculate in US real estate.
Oops, the Japanese learned from the 80’s.
Does this mean that the RE bubble heads and floppers are now officially (on the record) fighting the Fed? If so good luck and look out below.
Nevermind the $8.2 trillion number. According to the U.S. Comptroller, “the federal government’s fiscal exposures now total more than $46 trillion, up from $20 trillion in 2000.”
http://www.safehaven.com/article-4784.htm
It seems that although in public the Fed says that there isnt a housing bubble, that in private they are concerned about it. I think we go to 5%.
-x
BubbleTrack.blogspot.com
Forgive me if it’s been posted somewhere already, but the Mortgage Bankers Association’s quarterly delinquency figures were just released today. Q4 2005 delinquency rate (30 days or more behind on payments) came in at 4.7%, the highest going all the way back to Q2 2003. Many lenders and the MBA have used the “hurricanes ate my mortgage borrowers” excuse to explain the spike, and clearly, that accounts for some of the deterioration. But it’s also rising rates, the slowing housing market, overextended borrowers, the highest debt service ratios in U.S. history, etc., etc.
Story:
http://news.yahoo.com/s/ap/20060316/ap_on_bi_ge/late_mortgages_1
(In Mr. Burns’ voice) Excellent.
(In Nelson’s voice) HA HA.
This is just too much. But, pray tell, don’t let people stop getting boob jobs. There would go a great source of entertainment for the bounce in life. We can let the Hummers, boats, Hawaii vacations, etc go. Just not the boob jobs. Don’t want unemployed plastic surgeons now do we?
Absurd comments from a carnival barker:
“‘The same consideration apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode. Homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,’ Kohn said.”
So what is he saying, without the housing appreciation normalized interest rates are 3%,4%…?
The Fed neither wants deflation nor inflation. Both erode real asset values.
The Fed’s job is to stop deflation by all means necessary AS WELL AS stop inflation by all means necessary. This is the best way to minimize risk-premiums, which ultimately allow for efficient deployment of capital.
Nevertheless, one cannot argue that monetary policy has been far less volatile in the last 20 years versus the 20 years previous.
So even if economic cycles are inevitable, taking the punchbowl away when things are good and making sure things don’t get too bad, are the best ways to maximize wealth in the long-run.
Now the debate comes as to what is inflation versus what is deflation (prices or assets?) but that’s another debate.
“The Fed’s job is to stop deflation by all means necessary AS WELL AS stop inflation by all means necessary.”
Since when is this the Fed’s job? The Fed likes everyone to think it’s job is to control the economy, but actually Fed’s job is to monetize the government’s debt, that’s all.
Of course, if falling asset values bring down the economy as a whole, the Fed woudl re-flate.
Which leads to this question: where is the pain? We have massive borrowing but interest rates are still relatively low. We’ve had a huge run up in energy prices, but it has caused neither inflation nor less spending. Not what I would have guessed.
You should say that it has caused little “official” or reported inflation. Real inflation is in the pipeline though and the Genie will show himself soon.
the pain is being accumulated for later and it is gathering interest
Never believe a rumor until it is officially denied.
The housing bubble is far too big for the FED to simply ignore it. They are trying to hint it away to encourage a soft landing, if that’s even possible. SOmehow I have a difficult time believing anything they say… Better to just watch what they do.
My bet - they stop at 5% and quietly stiffen reserve requirements at member banks by playing with the risk evals…
The only inflation that counts is consumer price inflation, because that is the inflation which affects wages. If workers were willing to accept pay cuts, then mild deflation would be no worse than mild inflation. However, for psychological reasons, it is much easier to give overpaid workers a 1% pay raise when inflation is 3%, then to give them a 2% pay cut. Inflation lubricates the economy, in other words. Until human psychology changes, a well-managed economy must have a slight bias towards price inflation.
Asset deflation, by contrast, is no more problematic than asset inflation. This is because investors, especially professionals, have no problems responding as rationally to declines as torises in asset values.
Kohn’s statement is classic fed speak, both absolutely true and totally misleading at the same time.
He’s telling the truth when he says they won’t slash interest rates to prop up the bubble. However, when the bubble pops it will send the general economy into recession and deflation and they WILL lower rates to fight that. Net effect is the same.
The best that we can hope for is the Japanese example where they pumped enough money into the economy to keep consumer spending (and prices) stable while allowing the asset bubbles to deflate.
But the Japanese are savers and we are not, so the average Japanese had saving to help tide them over, plus the rest of the world helped to prop up their economy, and this will not happen when our bubbles deflate.