Bernanke Grounds The Helicopter
There is news on the interest rate front. “Mortgage applications fell for a third consecutive week as demand for loans to purchase homes dropped to its lowest level in more than two years. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended Feb. 10 decreased to 574.1, down 7.3 percent from the previous week’s 619.3.”
“The MBA’s seasonally adjusted purchase mortgage index, which is considered a timely gauge on home sales, fell 7.9 percent to 391.7 from the previous week’s 425.1, its lowest level since the week ended Dec. 26, 2003, when it hit 390.1. Borrowing costs on 30-year fixed-rate mortgages averaged 6.25 percent. The 30-year rate, however, was at its highest level since the week ended Dec. 9, 2005, when it touched 6.28 percent.”
“Federal Reserve Chairman Ben Bernanke said on Wednesday the U.S. economy was running so close to capacity that it faced heightened risks of an outbreak in inflation that could require higher interest rates to tame. In his first extensive remarks since taking office two weeks ago, Bernanke appeared to be making an effort to establish credentials as an inflation ‘hawk’ by stressing the need to keep price pressures contained.”
“‘The risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately, in the absence of countervailing monetary policy action, to further upward pressure on inflation,’ Bernanke said.” “He said high energy prices and the possibility of a slowdown in the U.S. housing market after a long boom were potential risks.”
“Ben Bernanke, the new chairman of the Federal Reserve, was once nicknamed ‘Helicopter Ben’ for suggesting during the deflation scare of 2003 that a central bank could always dump money from the sky to jump-start the economy. The suggestion earned Bernanke a reputation in financial markets for being a dove on inflation.”
“Some Fed watchers believe that Bernanke’s main task during his first testimony to Congress Wednesday and Thursday will be to remove any suspicion about his inflation-fighting credentials. ‘He’ll want to do whatever is necessary to counter this exaggerated image of ‘Helicopter Ben’,’ says John Lonski, chief economist at Moody’s Investors Service. ‘That means he doesn’t want to show weakness in regards to enemy No. 1, and that’s price inflation.’”
“Should he choose to accept it, Bernanke’s mission to convey he’s an inflation fighter has been made easier: After a fourth-quarter setback, economic growth and inflation pressures are rebounding in the first quarter. Employment and wage pressures picked up in January, and consumption also seems to be rebounding.”
“The market now prices in a 98% chance that the Fed will lift its key rate to 4.75% at its March 28 meeting and 100% chance that this rate will be reached by May 10. The market also now sees a 70% chance that 5% will be reached by the May meeting and 94% by the June meeting. Odds that the Fed would hike to 5% by the end of June were only at 24% just two weeks ago.”
“In his final year at the Fed, Greenspan began sounding alarm bells about the housing market, which has fueled consumption via ever-rising home equities. Greenspan, who largely created this environment by cutting rates to 1% in 2003 and keeping them there for a year, had began referring to ‘froth’ in the real estate market.”
no risk on housing slow down- it’s been a reality since july 4th- you dumb sht !
everything is ok here….let me crank up the rates….no danger….everything is fine….go back to your hummers
HAHA!
The unthinking and seemingly universal acceptance of the term “froth” is becoming tiresome. It trivializes the disconnect between prices and fundamentals in the housing market.
froth noun: A mass of bubbles
Just like the term “Recession” was once banned in Washington, so is the word “Bubble” today.
“Froth” will be looked back upon in the same way as Alfred Kahn’s tongue-in-cheek use of the word “Banana”.
Fed policy and the media are tightly related..
Consumer Sentiment and the Media
Don’t call Ben dumb just because you don’t understand why he is saying what he is saying.
grim
Northern NJ Real Estate Bubble
How will the housing bubble continue without “Helicopter Ben” flooding the world with liquidity??? Surely, this quote is taken out of context. What is Ben without his helicopter?
Gaming the Housing Bubble: the First Financial report
http://www.xanga.com/russwinter
You just know this guy is going to stop rate hikes soon enough this year. And once this happens watch the RE agents begin pitching “you’d better buy while we have a lull in the action” and the sheeple fall in line.
Sorry, but the gauntlet has been irrevocably cast. Paradoxically, he now can only stop hiking rates after the markets believe that he will keep hiking them as needed to choke off evident inflationary pressures. This may require crashing the economy a la Volcker. Prematurely ending rate hikes comes with the risk of living out his term as Fed chairman as Helicopter Ben and the added problem of having no credibility for anything he says.
Excellent insight, and the Volcker comparison might now seem unlikely but may soon become common.
The FED has been goosing both pedals at the same time. They have been boosting rates while keeping reserve requirements low and lending standards lax.
So they are basically doing a brake torque. Looks and sounds cool, but very hard on the car. Eventually something is going to break. Then they will have to choose a policy and really support it.
Bernanke really needs credibility, but it takes time to build a reputation. A lot of folks think he will overshoot on interest rates, some think he already has. For what it’s worth ($0) my personal belief is that no cartel can do what a free market ought to and that the FED is doomed in principal.
Maybe I am misinterpreting…
but my take on this article is that “Mr. B” actually has substantial CAHONE’S- and is not going to allow Greenspan’s FROTH to prolong into his new term as CHAIRMAN.
Bernanke said.” “High energy prices and the possibility of a slowdown in the U.S. housing market after a long boom were potential risks.”
To me, I interpret Ben B. as saying that inflation is getting out of control… gonna raise the rates- and tough $hit if the action “screws up” the housing market for flippers and speculators.
Am I DAZED and CONFUSED, or is there anyone else out there that sees it this way???
Although I hope you’re right but I tend to doubt it. Mr. “B” isn’t going to allow rates to rise much further. One more hike and that’s it.
The futures market on the Chicago Board of trade has priced in a 100% chance that he will raise rates to 5% by the end of the year. You might still have two more raises…
I for one am willing to take Bernanke at his word, unless and until he breaks it. Call me foolish, but I’m going to give the guy a chance.
I concur; see above.
The real ‘froth’ seems to be in the general economy. Jobs, capacity, outlooks all say pedal to the metal, boys - and it’s only going to take a one months pop in the core rate for BB to run rates up another 2%. SDBubblebeliever seems pretty close - BB is lining up his action plan and it says higher rates.
I’ll admit that I’m no expert - finance isn’t my thing - so you can take this with a grain of salt, but at this point I think raising rates up or down is irrelevant. I personally believe that we’ve maxed out on price. I think even the “sheeple” don’t want to spend huge amounts of money on nothing. People are dedicating too much of their income to housing expenses and were masking it by tapping equity. With increased awareness in the mortgage and appraisal industries there will be fewer fools allowed into the game and the appraisals will stop fanning the HELOC flames.
“For what it’s worth ($0) my personal belief is that no cartel can do what a free market ought to and that the FED is doomed in principal.”
I am with you on this one. The FED are socialist type planners in our system, when it has been proven that central planning doesn’t work. The people that are in tune with the planners are able to profit from this and wealth disequilibrium is worsened. If the country functioned before 1913 without a FED and allowed the natural business cycle to correct its own imbalances, why do we need one now? The FED is mearly postponing the natural business cycle with monetary policy but eventually the problems that the FED tried to mask will reassert themselves with more fury.
Maybe the government thought having a depression every 20 years or so wasn’t good for the general ecomony?
long term rates are controlled by world markets, not bb
HeliBen becomes HawkBen
He’s still Helicopter Ben.. He just wants us to think it’s a Black-Hawk instead of a Sikorsky.
“For what it’s worth ($0) my personal belief is that no cartel can do what a free market ought to and that the FED is doomed in principal.”
I am with you on this one. The FED are socialist type planners in our system, when it has been proven that central planning doesn’t work. The people that are in tune with the planners are able to profit from this and wealth disequilibrium is worsened. If the country functioned before 1913 without a FED and allowed the natural business cycle to correct its own imbalances, why do we need one now? The FED is mearly postponing the natural business cycle with monetary policy but eventually the problems that the FED tried to mask will reassert themselves with more fury.
I couldn’t agree more. The FED is arrogant and they all feel they can manipulate and massage the economy as they see fit. This game works for awhile, but the free market system eventually wins out. I agree that their policies only prolong the inevitable and can make corrections much more severe than if they stayed out and let the economic cycles run their course naturally. I also believe they should prick asset bubbles to keep them from getting wildly out of control. The FED basically does about the opposite of what I feel they should do.
I believe Bernanke will raise rates to 5% in the next meeting. He needs to shock the market into submission and gain credibility. He has to know that his nickname in the financial world is “Helicopter Ben.”
I interpret his statments today as saying that current rates still are accommodative and that we have a long way to go. I think that 5.5-6% will be the neutral and that ben won’t stop raising rates until its obvious that we’re in a recession. I think that’ll be in the 7% territory.
So everyone sees that he’s not helicopter Ben now! It was an easy forecast. His constituency wants low inflation, and he gets into more trouble if inflation takes off (read foreign central banks) than if the home-mortgage holders go under. He’’s probably done the calculation that they cant be saved anyway. At least not a large enough fraction to matter.
On abolishing the Fed, note that it is lack of regulation in the subprime mortgage world that is a principal cause of the housing bubble. It does not follow logically that the solution to the problem is to eliminate a regulatory agency. Very few of us remember the Depression, or the rather severe business cycle panics that preceded it. I dont think we wnat them back. For those that are nostalgic, maybe the next few years will offer a taste. I hope not, but we will see.
“Should he choose to accept it, Bernanke’s mission to convey he’s an inflation fighter has been made easier: After a fourth-quarter setback, economic growth and inflation pressures are rebounding in the first quarter. Employment and wage pressures picked up in January, and consumption also seems to be rebounding.”
Those strong economic numbers give the man a license, if not a mandate, to kill. Condo flippers, home builders, hedge fund analysts, and casino proprietors, be scared. Fed support for the froth on which your industries float has officially ended.
Here’s the actual quote regarding housing from Dr. Bernanke:
“On the one hand, some observers believe that home values have moved above levels that can be supported by fundamentals and that some realignment is warranted. Such a realignment–if abrupt–could materially sap household wealth and confidence and, in turn, depress consumer spending. On the other hand, if home values continue to register outsized increases….”
Typical two handed economist. But, give him credit. No fed. chairman is going to predict a sharp drop in home prices because he would be tarred with the charge of precipitating the collapse.
However, he does appear to have it on his radar screen as a risk to the economy, and one that would influence policy.
I have a bigger gripe with this 1970’s era mindset qoute:
“With the economy already operating in the neighborhood of its productive potential….”
Oh really? Has he not heard of outsourcing, imports, or, the possibility that new factories could be built?
Yes he has, but the 1970’s era rhetoric gives him good political cover for hiking rates.
I agree. He can’t possibly believe a 4.7% unemployment rate represents a lower (non-inflationary) limit, especially when the employment rate has fallen during this recovery.
So what then is the true reason for hikes? The housing bubble is the likely candidate, just as the dot.com bubble was the true target in 2000. I see the same outcome. He’ll pop the housing bubble, then ease like crazy to mop up the damage.
Reading between the lines, BB just doesn’t want to admit to the bubble outright, but his actions obviously lead to this conclusion. I have no doubt he and the fed staff are intelligent, dilligent people. While the government has the habit of promoting into spots party lackeys, its generally hard to fill a place with them. Plus definitively some have proven their worth. If we can see the writing on the wall and they devote their entire day to scrutinizing said wall, they know the growth was largely dependent upon construction/mortgage/home equity debt, unemployment numbers are bodged when compared to percentage of population employed, and as someone mentioned, the MBS/Housing Market is doomed anyway, so there’s no point. It would be the akin to telling people to abandon ship in the middle of the arctic as the Nude Cruise sinks beneath the waves with no lifeboats. All you’re doing is creating panic that serves no purpose. Other than perhaps perverse entertainment.
To acknowledge it risks accepting a share of the blame. (”Kill the messenger” effect). That is why AG spoke of “locally frothy markets,” not because the man is clueless.
I AGREE with Getstucco…
Mr. B knows that to be a LEADER he needs to put his foot down immediately. To ride on the shirt-tails of GREENSPAN, mambypamby’ing along with policies that are LONG on FROTH makes no sense.
Mr. B is going to have to be the BAD BOY, or the “Stern DADDY” that re-establishes the rules in the playroom.
BTW: The strongest corporations do the same thing… when things are going along great with lots of profits- cool. But when things start to TANK, the smart ones cut their costs (i.e. deadweight employees, specialty programs, benefits, pensions, etc.) all to stay afloat.
I believe that Mr. B will NIP IT IN THE BUD, right off the bat, so there is no discrepency of where Greenspan MILKED his last few years, and where “The Hawk” starts.
Uncertain times, for sure… but Mr. B has a better chance of being considered a LEADER in the long run- if he makes substantial decisions up front.
For all those SELLERS looking to wait for spring to make your killing… I would highly advise that you DUMP the house now. Besides the WIDESPREAD news that we are in a HOUSING BUBBLE… Less and Less buyers will be able to afford your OVERINFLATED asking price as these interest rates tick up.
“Mr. B is going to have to be the BAD BOY, or the “Stern DADDY” that re-establishes the rules in the playroom.”
I personally hate when I have to come down hard on my boys, but sometimes that is the only way to restore order.
Well Said GetStucco!
For all those SELLERS looking to wait for spring to make your killing… I would highly advise that you DUMP the house now.
Remember CATS + KITTENS… Realtors need to SELL SOMETHING in order to put bread + butter on their tables.
Just because they need to provide for their families doesnt mean that you have to fall for their BS and purchase a home at the pinacle of the biggest housing bubble of all time!!
forget the housing bubble. what about the coming commercial real estate glut. thats what we are about to see in dc
http://dcbubble.blogspot.com/2006/02/office-space-glut-looms.html
“at this point I think raising rates up or down is irrelevant.”
Irrelevant in the long run, but raising the rates may increase the speed of the downfall of the RE market, which would be good in my opinion, let just get it over with. In the short term lower rates would slow down the fall, but I don’t think it would have an effect on the final lows because once we get into the fall, the Fed will no longer have the ability even to make people think they have control over the interest rates - they will go where the market dictates, which will be higher.
“So what then is the true reason for hikes? The housing bubble is the likely candidate, just as the dot.com bubble was the true target in 2000. I see the same outcome. He’ll pop the housing bubble, then ease like crazy to mop up the damage.”"
I agree that RE is the target, but easing up won’t mop up the damage. This time I think that the markets, RE and Stock markets, are both going to correct; the stock market only partially corrected in 200-2002 and still has a long way to go to finish the correction.
BB may get the blame when the market falls after he raises the rates, but Greenspan should get it for letting the bubble happen. He should have raised the rates much sooner.
“the stock market only partially corrected in 200-2002 and still has a long way to go to finish the correction”
The correction ended in 2002/2003. In fact, the NYSE index and the Russell 2000 (a broad based average) both hit new all-time highs recently. It’s hard to make the case of a stock market bubble that is only partially done with its correction, when broad based averages are hitting new highs.
So while the home building stocks have been hit hard, and many dot.coms have never recovered, survivors and new companies are leading another upleg in a long term bull market that began in 1982.
Bottom line: If stocks hold up during this tightening phase, they should become the next bubble when the fed. eases.
The end has been forestalled, but the other shoe is yet to drop:
http://tinyurl.com/9prkq
P.S. Unless this time is different than the previous three times P/E ratios were comparably high to the Y2K level over 25 (including 1901, 1929, and 1966), then the secular bear market which began in Y2K and was forestalled by negative Fed Funds in 2003 will take another 10 years to bottom out at a P/E level of 5 before long term equity appreciation sets in. (Please refer to Shiller’s P/E graph in Irrational Exuberance if you want documentary evidence of the above points.)
But we all know that this time is different…
Almost forgot to ask, but just where do you see the new high on that DJIA chart? It looks to my eye like it was back in 2000, but maybe my eyes are getting tired…
The Dow is only 30 stocks, so a few dinosaurs can hold it back. Clearly it’s not representative of the market as a whole.
If new highs in the broader stock market averages after 5 years, doesn’t prove a forecast for a 15 year bear market wrong, what would in your mind?
P.S. Some time when you feel so-inclined, check out the series of huge temporary runups in stock market indexes in the early 1930s — all of which ultimately proved to be bear traps. The stock market did not finally get back on track until after WWII.
All stock market crashes play out like tsunamis, with short-term waves of euphoric recovery inundated by deeper waves of resurgent gloom. It is hard to make a case that history was wrong, and this time will be different.
The broader averages did not hit new highs at any time in the 1930’s so that’s not an accurate parallel.
Listening to local news tonight - quick caption on bernake’s talks were ” Bernake said greatest threats to economy were energy and housing costs”.
I have not had time to read full text of Ben’s statements - but if this caption summary is true - this is huge.
Translation: These are the things that are going to kill the economy
and I had nothing to do with creating, but were passed to me.
Bernanke (note spelling) needs to do two things off the bat:
1) Shed the Helicopter Ben label;
2) Spell out in muted tones the terrible hand he has been dealt, so that nobody can mistakenly pin the blame on him.