Fed President Charles Plosser Says Fed Is Helpless To Reverse Sharp Decline in House Prices

Tyler Durden's picture

Philly Fed's Plosser once again releases a slam dunk speech which is the most vocal critique of Ben Bernanke's interpretation of the freedoms afforded to him by monetary policy to date. "How do you use monetary policy to burst a bubble in Las Vegas real estate, where house prices were appreciating at a 45 percent annual rate by the end of 2004, without damaging the Detroit market, where prices were increasing at less than a 3 percent annual rate? Because monetary policy is such a blunt instrument, asking monetary policy to do what it cannot do, such as seeking to deliberately influence the evolution of asset prices, risks creating more instability, not less. Moreover, the moral hazard created by the belief that the central bank would intervene if prices of a certain class of assets became “misaligned” might, in fact, cause more inefficient pricing and more instability, not less...monetary policy cannot reverse the sharp decline in house prices when the economy has significantly over-invested in housing" And more: "I have advocated the elimination of Section 13(3) of the
Federal Reserve Act, which allowed the Fed to lend directly to
“corporations, partnerships and individuals” under “unusual and exigent
circumstances.”
" Plosser's conclusion is spot on, and means that Congress should immediately enact a limit on the Chairman's recently self-appointed 3rd mandate, which is to not only reflate the biggest asset bubble in history, but to get the Russell 2000 to 20,000: " I too am concerned that we are in the
process of assigning to monetary policy goals that it cannot hope to
achieve. Monetary policy is not going to be able to speed up the
adjustments in labor markets or prevent asset bubbles, and attempts to
do so may create more instability, not less. Nor should monetary policy
be asked to perform credit allocation in support of particular sectors
or firms. Expecting too much of monetary policy will undermine its
ability to achieve the one thing that it is well-designed to do:
ensuring long-term price stability."

The Scope and Responsibilities of Monetary Policy (link)

Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia
GIC 2011 Global Conference Series: Monetary Policy and Central Banking
in the Post-Crisis Environment, The Central Bank of Chile, Santiago,
Chile, January 17, 2011

Introduction

I am delighted to speak before the Global Interdependence Center’s
event today, and I especially want to thank Governor José De Gregorio
and the Central Bank of Chile for hosting today’s conference. I have
been trying to repay a visit that Governor De Gregorio made to the
Philadelphia Fed for a GIC conference in 2008. And I am glad that our
schedules finally made possible my first visit to this beautiful
country.

As the title of the conference today suggests, Governor De Gregorio
and I share some unique challenges in conducting monetary policy in a
new world, a post-crisis world. Yet I believe some old lessons still
apply. I would like to begin with a quote that some of you may
recognize.

“...we are in danger of assigning to monetary policy a larger role
than it can perform, in danger of asking it to accomplish tasks that it
cannot achieve, and, as a result, in danger of preventing it from making
the contribution that it is capable of making.”

Milton Friedman spoke these words in his presidential address before
the 80th meeting of the American Economic Association in 1967.1
Although that was over 40 years ago, I believe Friedman’s caution is
one well worth remembering, especially in this world where central banks
have taken extraordinary actions in response to a financial crisis and
severe recession. I believe the time has come for policymakers and the
public to step back from our focus on short-term fluctuations in
economic conditions and to think more broadly about what monetary policy
can and should do.

It may help to put Friedman’s words into context. His remarks were
directed at an economics profession that had gravitated toward believing
that there was a stable and exploitable trade-off between inflation and
unemployment — otherwise known as the Phillips curve. According to this
view, policymakers should pick a point on the Phillips curve that
balances the nation’s desire for low unemployment and low inflation.
Friedman argued that this was a false trade-off and the experience in
the U.S. in the decade that followed his remarks, often referred to as
the Great Inflation, was a painful demonstration of Friedman’s valuable
insight. In particular, that episode illustrated starkly that there was
no stable relationship between inflation and unemployment. We learned
the dangers inherent in monetary policies that take low inflation for
granted in a world of high unemployment or perceived large output gaps.
Our experiences clearly showed that efforts to manage or stabilize the
real economy in the short term were beyond the scope of monetary policy,
and if policymakers made aggressive attempts to do so, it would
undermine the one contribution monetary policy could and should make to
economic stability — price stability.

Of course, monetary theory has advanced in the past three decades
with more sophisticated models and empirical methods to test the
validity of these models. However, the proper scope of monetary policy
remains an important issue today. In response to the global financial
crisis, central banks have been asked to use monetary policy and other
central bank functions to deal with an increasing array of economic
challenges. These challenges include high unemployment, asset booms and
busts, and credit allocations that fall more properly under the purview
of fiscal policy. I believe we have come to expect too much from
monetary policy. Indeed, broadening its scope can actually diminish its
effectiveness. When monetary policy over-reaches and fails to deliver
desired, but unattainable, outcomes, its credibility is undermined. That
makes it more difficult to deliver on the goal it is actually capable
of meeting. Moreover, when the central bank is asked to implement
policies more appropriately assigned to fiscal authorities, the
independence of monetary policy from the political process is put at
risk, which also undercuts the effectiveness of monetary policy.

In my remarks today, I want to discuss the appropriate scope of
monetary policy in dealing with real economic fluctuations, asset-price
swings, and credit allocation. In doing so, I want to reinforce
Friedman’s caution that we should be careful not to expect too much of
monetary policy. I believe that if we recognize the limits to what
monetary policy can do effectively, we will be better able to understand what monetary policy should do.

Before continuing, I should note that these are my views and not
necessarily those of the Federal Reserve Board or my colleagues on the
Federal Open Market Committee.

Monetary Policy and Real Economic Fluctuations

The U.S. Congress has established the broad objectives for monetary
policy as promoting “effectively the goals of maximum employment, stable
prices and moderate long-term interest rates.” This has typically been
characterized as the “dual mandate,” since if prices are stable and the
economy is operating at full employment, long-term nominal interest
rates will generally be moderate.

Most economists now understand that in the long run, monetary policy determines only the level of prices and not the unemployment rate or other real variables.2
In this sense, it is monetary policy that has ultimate responsibility
for the purchasing power of a nation's fiat currency. Employment depends
on many other more important factors, such as demographics,
productivity, tax policy, and labor laws. Nevertheless, monetary policy
can sometimes temporarily stimulate real economic activity in the short
run, albeit with considerable uncertainty as to the timing and
magnitude, what economists call the “long and variable lag.”
Any boost
to the real economy from stimulative monetary policy will eventually
fade away as prices rise and the purchasing power of money erodes in
response to the policy. Even the temporary benefit can be mitigated, or
completely negated, if inflation expectations rise in reaction to the
monetary accommodation.

Nonetheless, the notion persists that activist monetary policy can
help stabilize the macroeconomy against a wide array of shocks, such as a
sharp rise in the price of oil or a sharp drop in the price of housing.
In my view, monetary policy’s ability to neutralize the real economic
consequences of such shocks is actually quite limited. Successfully
implementing such an economic stabilization policy requires predicting
the state of the economy more than a year in advance and anticipating
the nature, timing, and likely impact of future shocks. The truth is
that economists simply do not possess the knowledge to make such
forecasts with the degree of precision that would be needed to offset
the economic shocks. Attempts to stabilize the economy will, more likely
than not, end up providing stimulus when none is needed, or vice versa.
It also risks distorting price signals and thus resource allocations,
adding to instability. So asking monetary policy to do what it cannot do
with aggressive attempts at stabilization can actually increase
economic instability rather than reduce it.

Therefore, in most cases the effects of shocks to the economy simply
have to play out over time as markets adjust to a new equilibrium.
Monetary policy is likely to have little ability to hasten that
adjustment. In fact, policy actions could actually make things worse
over time. For example, monetary policy cannot retrain a workforce or
help reallocate jobs to lower unemployment. It cannot help keep gasoline
prices at low levels when the price of crude oil rises to high levels.
And monetary policy cannot reverse the sharp decline in house prices
when the economy has significantly over-invested in housing. In all of
these cases, monetary policy cannot eliminate the need for households or
businesses to make the necessary real adjustments when such shocks
occur.

Let me be clear that this does not mean that monetary policy should
be unresponsive to changes in broad economic conditions. Monetary
policymakers should set their policy instrument — the federal funds rate
in the U.S. — consistent with controlling inflation over the
intermediate term. So the target federal funds rate will vary with
economic conditions. But the goal in changing the funds rate target is
to maintain low and stable inflation. This will foster the conditions
that enable households and businesses to make the necessary adjustments
to return the economy to its sustainable growth path. Monetary policy
itself does not determine this path, nor should it attempt to do so.

For example, if an adverse productivity shock results in a
substantial reduction in the outlook for economic growth, then real
interest rates tend to fall. As long as inflation is at an acceptable
level, the appropriate monetary policy is to reduce the federal funds
rate to facilitate the adjustment to lower real interest rates. Failure
to do so could result in a misallocation of resources, a steadily
declining rate of inflation, and perhaps even deflation.

Conversely, when the outlook for economic growth is revised upward,
real market interest rates will tend to rise. Provided that inflation is
at an acceptable level, appropriate policy would be to raise the
federal funds rate. Failure to do so would result in a misallocation of
resources and, in this case, a rising inflation rate.

In both cases, changes in the federal funds target are responding to
economic conditions in order to keep inflation low and stable and doing
so in a systematic manner. Monetary policy is not
trading off more inflation for less unemployment or vice versa. As I
have already argued, the empirical and theoretical case for such a
trade-off is tenuous at best. And the data to support the view that
central banks can favorably exploit such a potential trade-off are even
more dubious.

So what should monetary policy do? To strengthen the central bank’s
commitment to price stability, I have long advocated that the Federal
Reserve adopt and clearly communicate an explicit numerical inflation
objective and publicly commit to achieving that objective over some
specified time period through a systematic approach to policy. It is one
of the messages of economic research over the last 40 years that policy
is best conducted in a rule-like manner. This helps the public and the
markets understand and better predict how policy will evolve as economic
conditions change. This reduces volatility and promotes transparency
and more effective communication.

An inflation objective coupled with a rule-like approach to policy
decisions would make the central bank’s commitment more credible and
policy more effective in achieving its goals. Indeed, the Federal
Reserve is one of the few central banks among the major industrialized
countries that have not made such a public commitment. I believe it is
time we did. Such a commitment will help the public form its
expectations about monetary policy, which would enhance macroeconomic
stability.

Monetary Policy and Asset Prices

Let me now turn to the role of monetary policy in the evolution of
asset prices. Some argue that monetary policy can be a source of
distorted asset prices. That can be a problem, but it usually occurs
when policy deviates from the sort of systematic policy rules that a
price level or inflation target would suggest. Thus, a systematic
approach to achieving price stability would help monetary policymakers
avoid exacerbating the effects of asset-price swings on the economy.
Putting aside monetary-policy-induced asset-price swings, I think it is
fair to say that the broad view among many monetary policymakers is that
asset prices should not be a direct focus of monetary policy. They
generally accept the idea that various forms of prudential regulation or
supervision are better suited to address such challenges, should it be
called for, than monetary policy. Yet the housing boom, its subsequent
collapse, and the financial crisis that followed have caused some to
rethink this position concerning the scope of monetary policy.

No one takes issue with the view that asset prices are important in
assessing the outlook for the economy and inflation. Movements in asset
prices can provide useful information about the current and future state
of the economy. Even when a central bank is operating under an
inflation target, asset prices are informative. Put another way,
judgments about the inflationary stance of monetary policy should be
informed by a wide array of market signals, including asset-price
movements.3
So while asset prices may be relevant in the normal course of monetary
policymaking, the presumption is that such prices are responding
efficiently and correctly to the underlying state of the economy,
including the stance of monetary or fiscal policy. The bottom line of
this view is that monetary policy should not seek to actively burst
perceived asset bubbles.

Other people, especially in light of the recent financial crisis,
advocate an active role for monetary policy to restrain asset-price
booms. They tend to believe that asset prices are not always tied to
market fundamentals. They worry that when asset values rise above their
fundamental value for extended periods — that is, when a so-called
bubble forms — the result will be an over-investment in the over-valued
asset. When the market corrects such a misalignment — as it always does —
the resulting reallocation of resources may depress economic activity
in that sector and possibly the overall economy. Such boom-bust cycles
are, by definition, inefficient and disruptive. So, the argument goes,
policy should endeavor to prevent or temper such patterns.

This argument for monetary policy to respond directly to a perceived
mispricing of specific assets is controversial. It requires that
policymakers know when an asset is over-priced relative to market
fundamentals, which is no easy task. For example, equity values might
appear high relative to current profits, but if market participants
expect profit growth to rise in the future, then high equity values may
be justified.

Another challenge in addressing asset-price bubbles is that contrary
to most of the models used to justify intervention, there are many
assets, not just one. And these assets have different characteristics.
For example, equities are very different from real estate. Misalignments
or bubble-like behavior may appear in one asset class and not others
and may vary even among a specific asset class. But monetary policy is a
blunt instrument. How would policymakers have gone about pricking a
bubble in technology stocks in 1998 and 1999 without wreaking havoc on
investments in other asset classes? After all, while the NASDAQ grew at
an annual rate of 81 percent in 1999, the NYSE composite index grew just
11 percent. What damage would have been done to other stocks and other
asset classes had monetary policy aggressively raised rates to dampen
the tech boom. During the housing boom, some parts of the U.S. housing
market were experiencing rapid price appreciation while others were not. How do you use monetary policy to burst a bubble in Las Vegas real
estate, where house prices were appreciating at a 45 percent annual rate
by the end of 2004, without damaging the Detroit market, where prices
were increasing at less than a 3 percent annual rate?

Because monetary policy is such a blunt instrument, asking monetary
policy to do what it cannot do, such as seeking to deliberately
influence the evolution of asset prices, risks creating more
instability, not less. Moreover, the moral hazard created by the belief
that the central bank would intervene if prices of a certain class of
assets became “misaligned” might, in fact, cause more inefficient
pricing and more instability, not less.

Monetary Policy and Credit Allocation

Finally, let me address another issue that has loomed large during
the crisis and where great caution is required going forward — the role
of monetary policy in credit allocation. At various times during the
crisis, the Federal Reserve and many other central banks around the
world intervened in various markets to facilitate intermediation. In
many cases, these efforts were targeted to specific sectors of the
economy, to specific types of firms, or in some cases, to specific
firms.

Most of these efforts were justified on the grounds that central
banks should act as “lender of last resort” in order to preserve
financial stability. The specific criteria for undertaking these actions
could not help but be somewhat arbitrary as policymakers had little
experience with such a crisis, and little theory to guide them beyond
Walter Bagehot’s dictum from the 1873 classic Lombard Street to limit systemic risk by “lending freely at a penalty rate against good collateral.”4
In general, these actions, especially in the U.S., involved extensive
use of the central bank’s balance sheet and likely went far beyond what
Bagehot would have imagined.

Even when it is appropriate for a central bank to function as a
lender of last resort, it should follow a rule-like or systematic
approach. This suggests announcing in advance the criteria that will be
used to lend and who will be eligible to participate. Economic and
financial stability would be best served by establishing such guidelines
in advance and committing to following them in a crisis. That
commitment is hard to deliver on, but institutional constraints can help
tie the hands of policymakers in ways that limit their discretion. Most
central banks, including the Fed, have not developed such systematic
plans and thus behaved in a highly discretionary manner that generated
moral hazard and volatility.

My purpose here is not to critique the myriad programs that were put
in place or the varying degrees of moral hazard they created but to make
a more general point — one that I have made before: that these actions,
for the most part, are better thought of as forms of fiscal policy, not
monetary policy, because they involved allocating credit and putting
taxpayer dollars at risk. Moreover, asking monetary policy to do
something that it should not do — engage in fiscal policy — can be
detrimental to the economy by undermining monetary policy’s
effectiveness at maintaining its ultimate responsibility: price
stability.

A body of empirical research indicates that when central banks have a
degree of independence in conducting monetary policy, more desirable
economic outcomes usually result. But such independence can be
threatened when a central bank ventures into conducting fiscal policy,
which, in the U.S., rightly belongs with Congress and the Executive
branch of government. Having crossed the Rubicon into fiscal policy and
engaged in actions to use its balance sheet to support specific markets
and firms, the Fed, I believe, is likely to come under pressure in the
future to use its powers as a substitute for other fiscal decisions.
This is a dangerous precedent, and we should seek means to prevent such
future actions.5

I have long argued for a clear bright line to restore the boundaries
between monetary and fiscal policy, leaving the latter to Congress and
not the central bank. For example, I have advocated the elimination of
Section 13(3) of the Federal Reserve Act, which allowed the Fed to lend
directly to “corporations, partnerships and individuals” under “unusual
and exigent circumstances.” The Dodd-Frank Wall Street Reform and
Consumer Protection Act sets limits on the Fed’s use of Section 13(3),
allowing the Board, in consultation with the Treasury, to provide
liquidity to the financial system, but not to aid a failing financial
firm or company.6
But I think more is needed. I have suggested that the System Open
Market Account (SOMA) portfolio, which is used to implement monetary
policy in the U.S., be restricted to short-term U.S. government
securities. Before the financial crisis, U.S. Treasury securities
constituted 91 percent of the Fed’s balance-sheet assets. Given that the
Fed now holds some $1.1 trillion in agency mortgage-backed securities
(MBS) and agency debt securities intended to support the housing sector,
that number is 42 percent today. The sheer magnitude of the
mortgage-related securities demonstrates the degree to which monetary
policy has engaged in supporting a particular sector of the economy
through its allocation of credit. It also points to the potential
challenges the Fed faces as we remove our direct support of the housing
sector.

Decisions to grant subsidies to specific industries or firms must
rest with Congress, not the central bank. That is why I have advocated
that the Fed and Treasury reach an agreement whereby the Treasury
exchanges Treasury securities with the non-Treasury assets on the Fed’s
balance sheet. This would transfer funding for the credit programs to
the Treasury, thereby ensuring that policies that place taxpayer funds
at risk are under the oversight of the fiscal authority, where they
belong. And it would help ensure that monetary policy remains
independent from fiscal policy and political pressure.

Conclusion

Although it has been over 40 years since Milton Friedman cautioned
against asking too much of monetary policy, his insights remain
particularly relevant today. I too am concerned that we are in the
process of assigning to monetary policy goals that it cannot hope to
achieve. Monetary policy is not going to be able to speed up the
adjustments in labor markets or prevent asset bubbles, and attempts to
do so may create more instability, not less. Nor should monetary policy
be asked to perform credit allocation in support of particular sectors
or firms. Expecting too much of monetary policy will undermine its
ability to achieve the one thing that it is well-designed to do:
ensuring long-term price stability. It is by achieving this goal that
monetary policy is best able to support full employment and sustainable
growth over the longer term, which benefits all in society.

  • 1 Milton Friedman, “The Role of Monetary Policy,” American Economic Review, 58:1 (March 1968), pp. 1-17.
  • 2
    There are some extreme cases. If the monetary authority engineers a
    hyperinflation, it is likely to have deleterious effects on output and
    employment.
  • 3
    Research does offer some support for the predictive value of various
    asset-price movements for the future path of inflation; however, the
    evidence varies considerably across types of assets and, in my view, is
    not overwhelmingly supportive.
  • 4 Walter Bagehot, Lombard Street: A Description of the Money Market (New York: E.P. Dutton and Company, 1921). [Orig.pub. 1873]
  • 5 See Charles I. Plosser, “Credible Commitments and Monetary Policy After the Crisis,” speech at the Swiss National Bank Monetary Policy Conference, Zurich, Switzerland, September 24, 2010.
  • 6 See Charles I. Plosser, “The Federal Reserve System: Balancing Independence and Accountability,” speech at the World Affairs Council of Philadelphia, February 17, 2010.

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TheGreatPonzi's picture

That's a lie from Plosser. The FED is in the possibility of buying every single REO in the USA, and every single delinquent mortgage, with printed money. 

They just prefer to focus on stocks right now with their electronic printing press, because if real estate can cause a big recession, the real important thing is stocks (a drop causes a domino fall of effects, notably on banks balance sheets, counterparties and pension funds).

In both cases, the dollar won't survive. But saying that the FED technically can't support house prices is a lie.

Popo's picture

Houses are not an asset class, they are a consumer durable like cars.

Assets don't decompose, leak, require maintenance, or get consumed through normal every day existence. Consumer durables do. Houses also come with massive tax exposure - and require annual bloodlettings to government for the privilege of ownership. (if one can even call it ownership when it is so obviously rented from the government). By any measure, housing is not a financial asset class by any traditional use of the term.

Mortgage bankers and their feral dogs, the Realtors, preach the mythology of housing as an asset class to justify valuation. It is the first step in the scam.

It is also why preservation of values is impossible.

Buy a house to live in. Forget the mythology of "investing" in a home. That is a lie that has been sold to Americans for too long.

Sudden Debt's picture

Houses are not an asset class, they are a consumer durable like cars.

especially when they are made out of durable Chinese drywall cardboard paper :)

Building a house out of bricks and concrete is just so "European" backward thinking. :)

Popo's picture

Well... bricks and concrete aren't European, considering neither originated there. : ). But suffice to say that choice of building material does not alter housing's status as a durable good - while it does have an effect on the rate of consumption.

DarkAgeAhead's picture

I'd disagree.  When one applies building science, essentially applying the laws of thermodynamics to building, you can stretch the rate of consumption over a sufficiently long period to cross that threshhold that you're drawing.

And if you own any land, say a half acre or more, using ecological principles for gardening, etc...you can stretch the functional requirements for life, such as soil fertility, food production, water & air purification, etc., into perpetuity.  Or on any timeline that a human can contemplate...

TheGreatPonzi's picture

That's true.

I'd even add that investing in a house does not produce value - it's just speculation. Speculation that the population growth/economic growth will cause your four walls to be worth more in the future. It's a bit childish and egoistic, when you think about it more thoroughly. I don't think that in the end, your "investment" raises the quality of life of people or produces real economic growth/social/technological progress. Except, of course, if you renovate the houses.

Without fractional banking and central bank planning, would houses continue to gain value over years? I don't even think so, as the market would automatically adjust itself to the demand.

In a gold-standard world without fractional banking, the only real investments would be investments that produce technological and savoir-faire progress.

bunkermeatheadprogeny's picture

Thats why everyone bought into the idea prior to the collapse that "house prices never go down."

Housing as an investment was an easy sale because home prices had continued to go for the last 50 years (save for the small dip during the S&L crisis that affected commercial properties more than residential properties).

The drive in housing prices and demand was the baby-boomer effect, like a rat passing through the entire length of a snake.

There was a large uptick in births in the mid-2000's, but those kids will not start their own families until the 2020's.

Until that time, no matter what the Fed or the U.S. Govt does, there is no replace for good ol supply and demand.

The best thing that could happen to the U.S. housing market is a string of hurricanes, earthquakes, fires, and floods followed by a ban on rebuilding in disaster prone areas.

DarkAgeAhead's picture

You rent from Nature, but own relative to the law of Man.  I buy because a fee simple absolute is an essential element in any bundle of rights that comprises "freedom" or "justice."

Otherwise, we are merely serfs

Perhaps the only difference is that you seem to implicitly accept the powers that be argument that property ownership isn't all that great...whereas I see this most recent implosion and Fed bubbling in real estate as a way for the super-rich to decelerate back into earlier days of feudalism. 

There's no reason today that you can't build (or renovate) a house to last 1,000 years.  That's forever enough to me and my future generations to make it meaningful enough.

And to taxes, yes they're a blight for the most part, a means to reward public greed, overreaching and corruption - especially in patronage and public pensions.  But tax should never dictate substance, or alter the way we fundamentally view property ownership.  If we allow that, then the elites have truly won. 

As a way to fight that battle, I'd invite you to check out how the "old timers" do it in my community.  From the outside, viewing many houses in my region, you'd think mostly serial killers or gimps in basement dungeons littered the landscape.  Unpainted, unmaintained from the tax assessor's view from the road...  But head inside and you'd find, in some, 5 star luxury.

The assessor shall never step foot onto my property.

So I'm "investing" in something with my home that's priceless relative to any measure of fiat or other currency.

JR's picture

Excellent post.

The banker elite’s idea is to have you deal in paper rather than property because they can control paper, dictate its value.  But they have a harder time dictating the value of something that is physical, like gold, or property.  This corruption over current housing doesn’t change the fact that people are living in their property.  During the great depression when there were a great number of farmers, the farmers survived with their vegetable gardens; they pushed harder to grow fruits and vegetables.  And, after they took care of their needs, they used the excess in produce to buy things in town through barter.

If, instead of that farm, they had owned stock or kept their money in a bank, they probably would not have gotten through the deepest of the Great Depression as well. By late 1932 stocks had dropped to only about 20 percent of their value in 1929. As for money in the bank, by 1933, 11,000 of the United States' 25,000 banks had failed. (The FDIC was formed in 1933.)

At the present time, with many people owning homes, homes can be rented, they can be sold, or they can be lived in.  Or, as you say, you can build a house on land you own that will last a thousand years, that your children and their children and their great grandchildren can live in.  And no matter how the Fed tries to extract its value, your family has shelter.

Your house may not be a farm, but it has similar value in hard times; you can rent out a room or the garage, live in one room and rent out the rest of the house, or live with your parents and rent your house totally. It’s a physical asset.  You can’t do that with Apple stock if the market collapses before you can get out.

Even foxes have dens and birds have nests...a place to lay their heads…  Do Americans really aspire to walk the “road to serfdom,” to be among, say, the hundred million homeless residents, the migrant workers, in China who have migrated illegally to the cities and cannot have official addresses there, those people who make up the brunt of the workforce in the new manufacturing centers of China--to slave for the multinational corporations, for Apple, and Dell, and IBM…? 

DarkAgeAhead's picture

Thanks for the thoughts.  Fantastic stuff.

And definitely, a farm itself is a local economy, largely out of reach of politicians, bankers and global elites (as you indicate well).  Wendell Berry's essay, Solving for Pattern, really brought that home for me.

Once we as a people are persuaded that property ownership simply something to be monetized, the worst manipulations become not only possible but inevitable - you cite a great example, of migrant workers in China.

Oh regional Indian's picture

Excellent observation Popo. That is quite the switch they succeeded in having people make, that an asset that puts you in perpetual debt-slavery, one you do not even ever really own, as the most desirable asset out there.

The nightmare of home "ownership" was sold as a dream.

Some famous song, cannot remember who did it.... Waking up is Hard to do.

ORI

http://aadivaahan.wordpress.com/2011/01/14/quiet-days-watery-days/

Mark Medinnus's picture

Some bozo flagged you ORI, but not me.  Thou art my friend whose insight I value.  M

DarkAgeAhead's picture

What's the better alternative?

Nothing better to own that dirt, for many reasons.

Snidley Whipsnae's picture

Spot on POPO... Unfortunately the entire thrust of government encouragement to entice people to become 'homeowners' is now being exposed for the sham that it always was.

'Investment' in a home was a practical idea as long as America maintained a large middle class and jobs were fairly stable, not requiring a lot of moving around the country to find another job. Now that the middle class is being whittled down to fewer members we are finding that enormous amounts of capital have been misdirected into residential real estate. How will people with jobs that pay banana republic wages afford to maintain and pay taxes on the empty McMansions?

Individual states are raising RE taxes on homes that are depreciating in value. How long till all but the 10% of top wage earners (primarily those in the FIRE sector and government unionized employees) find themselves completely priced out of home 'ownership'?

Boomers are aging. At some point they can no longer maintain a home even if they can afford the taxes and major maintenence costs. Who will purchase the Boomer's homes when they move to assisted living facilities or pass away?

Bernank has thrown a zillion dollars at a problem that is without a solution, imo.

blindfaith's picture

Bernanke is a narcisses, just like Greenspan and most of wall street, the bankers, and our leaders too ( I invite you to look up the meaning so there is no mistake on what I am stating).

 

Now that the barn is empty of cash, the "assets" are of questionable value to anyone...these guy come out of the woodwork and warn us?  Where the hell was this guy when the boat was still floating.

As for state, county and federal workers and the military too, the days are counting before you will be paid in IOU's to take to the Safeway, Giant, Cosco, etc. ...and oh yes, the bank holding your mortgage.  Somehow, folks just can't believe that what effects your neighbor also affect you.  Ronald Regan didn't have any problem shaving government.

Hacksaw's picture

Bingo, we have a winner.

Sudden Debt's picture

where house prices were appreciating at a 45 percent annual rate by the end of 2004

Same here in Europe where it still continues. Housing prices have gained on average 10% and are still doing so.

Just ignore the ageing population and the constant building. It will surely keep on rising...

The solution to prevent a big drop in housing was countered by increasing the migration of foreigners to fill the gaps of empty houses.

Strangely... the +500.000 euro aren't the kind of houses that are rented of bought by that group of people... BUT THE WILL VERY SOON! We are confident!

Somehow the "navites" don't agree with that kind of politics...

http://www.filipdewinter.be/wp-content/uploads/2010/11/fdw-blok-ref-zwits.jpg

and after a few decades of migration, not everybody is confident that they are the sollution and that they will be the once who will work to pay for our pensions... BUT WE ARE CONFIDENT that ALIENS will soon visit the earth and will do a better job AND pay for our pensions and buy our houses!!

 

Catullus's picture

He outlines the case for ending the Fed again.

"Because monetary policy is such a blunt instrument, asking monetary policy to do what it cannot do, such as seeking to deliberately influence the evolution of asset prices, risks creating more instability, not less. Moreover, the moral hazard created by the belief that the central bank would intervene if prices of a certain class of assets became “misaligned” might, in fact, cause more inefficient pricing and more instability, not less."

And

Nor should monetary policy be asked to perform credit allocation in support of particular sectors or firms. Expecting too much of monetary policy will undermine its ability to achieve the one thing that it is well-designed to do: ensuring long-term price stability. It is by achieving this goal that monetary policy is best able to support full employment and sustainable growth over the longer term, which benefits all in society.

 

These are completely contradictory statements.  How can the Fed achieve long-term price stability when using monetary policy to deliberately influence asset prices risks creating more instability? Seems to me like having a lack of any monetary policy whatsoever would create greater stability under that logic.

Rogerwilco's picture

If interest rates were at normal levels, monetary policy works well enough, not perfectly, but well enough. The madness in their method is ZIRP.

BTW, I interpret his ongoing remarks as the makings of a palace coup at the Fed. Beware the ides of March, Benny boy.

Mark Medinnus's picture

ZIRP is merely another branch hiding the root we should strike, IMO.

Catullus's picture

There are too many qualitative statements in that. What is perfectly run monetary policy? What's well enough? What are normal levels? Why is ZIRP any different than 1% or 3%?

No need to answer. Just making a point.

Snidley Whipsnae's picture

Only one entity is capable of setting interest rates...Mr Market.

Any intervention by the Fed, Treasury or  Government, has proven futile in all cases.

Yet the azz hats at the Fed continue their futile and feeble attempts to control Mr Market...of course, in the meantime the Fed is directing capital to it's pals in the FIRE sector...making hay while the sun shines. Hell, who would not print up monopoly money to purchase real commodities? It's a sweet deal when one can trade something for nothing, right?

America has been raped by the bastards since the inception of the organization. When is enough enough?

DarkAgeAhead's picture

I bet if somebody took the time to analytically quantify, even deeper than Mr. Market in setting rates, is Mother Nature.

EDIT - Tainter, Homer-Dixon and others have interestingly thought in those circles...

johngaltfla's picture

The home ownership rate is too high in the United States anyways so until we see a sub 61% print, there will be no stabilization of pricing. Not to mention the communities with excess inventory are just going to have to accept the idea of bulldozing the empty homes once and for all.

bronzie's picture

"The home ownership rate is too high in the United States"

this is a data point that most people aren't aware of

not only did the price of real estate reach bubble proportions, so did the rate of home ownership

at the peak we had 66% ownership and Bush was making noises about everybody should be an owner - he called it the "ownership society" or something like that

as johngaltfla is pointing out here, the home-ownership bubble will pop along with the price bubble and we will see sub-61% ownership rates before the current downtrend is over

Mark Medinnus's picture

With ownership understood as squatting in boxes they didn't own and could never afford.  Illusion are nice till dispelled.  Like pride before a fall. 

Snidley Whipsnae's picture

Bulldoze the houses? More misallocation of capital?

I suggest you think about this...

"Bastiat's original parable of the broken window from Ce qu'on voit et ce qu'on ne voit pas (1850):

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented."

 

http://en.wikipedia.org/wiki/Parable_of_the_broken_window

blindfaith's picture

humm...sorta like us sending our precious military boys and girls into Iraq and Afghanistan to destroy buildings...oops I mean  hidding places, and then we send billions to these countries "leaders" to rebuild the country as the corrupt leaders see fit.  Right...did I get that right?

DarkAgeAhead's picture

Bulldoze?  That, literally, creates an ecology of death.  No community or nation has ever bulldozed itself to economic prosperity, let alone ecological health, which incidentally, underlies all economic prosperity.

Deconstruct, perhaps, as this creates up to 19 jobs for every 1 in demolition.

But demolish...that's self-inflicted cultural ecocide.

dcb's picture

I hope someone send this to douchebag krugman or links it to his blog.

you want to stop the hosuing bubble, you legislate higher requirements for home loans, 10%, 20%. 30%. this stops the housing bubble. you can't use monetary ploicy for things that need structural policy fixes. I bring this up all the time on his blog, of course he doesn't address it.

The man is like a human test tube, nothing he talks about has real  world applications, and worse he is an apologist for an amoral corrupt federal reserve. these people running that institution are guilityu of crimes against humanity. cut off food supplies to people the world court hangs you. free up monetray policy so many starve to death they call you the head of the federal reserve and a hero for bailing out wall street. the man and his agents are guility of crimes against humanity, using the tools of monetray policy to cause untold damage. much more than Osama ever did.

blunderdog's picture

Legislating loan requirements is a horrible idea.  It's not the government's responsibility to prevent banks from making bad loans, and it makes no sense to sink more public effort into the protection and maintenance of the most profitable businesses of the past 30 years.

Even if such legislation were created, motivated bankers/borrowers would just fake their way through the requirements anyway.

Worst possible idea.

scatterbrains's picture

I agree completely but not so long as we are back stopping them and preventing them from failing.

blunderdog's picture

Creating laws that you know cannot possibly work is always worse than doing nothing, no matter what other considerations are involved.

miker's picture

An extremely well written and spot-on analysis by a wise man in the Fed.  Hopefully, he will be able to convince members of Congress to move forward on his recommendations.

What he is saying is that the Fed is necessary and beneficial when staying within it's capabilities and role but risks all sorts of problems in trying to solve problems it can't solve.

This is the kind of professional reasoning that is needed to move the Fed back to where they should be.  I particularly like his recommendation to have the Treasury swap the MBS debt with the Fed and take responsibility for that through fiscal policy avenues, as such

Mark Medinnus's picture

"the Fed is necessary and beneficial when"

Translation for simple folks like me:

"Cancer is necessary and beneficial when"

max2205's picture

Ah well they don't choose to help the housing market. They choose the bond market money market and stock market and most importantly the derivatives market. They could give a s2$/)6t about the peasants

bronzie's picture

"move the Fed back to where they should be"

we should push the Fed back to Jekyll Island and then keep pushing until they have all drowned in the sea ...

Mark Medinnus's picture

Bronzie, let's go waterboarding off the coast of Georgia!

Mark Medinnus's picture

"I have advocated the elimination of Section 13(3) of the Federal Reserve Act..."

Like plucking berries from the bramble, the problem remains.  Placing Plosser in perspective: a fool should not be praised for one less misstep. 

michigan independant's picture

Of course, monetary theory has advanced in the past three decades with more sophisticated models and empirical methods to test the validity of these models. However, the proper scope of monetary policy remains an important issue today. How can a blunt instrument effectively be sophisticated...

http://www.fullbooks.com/Lombard-Street--A-Description-of-the-Money1.html

Walter Bagehot, Lombard Street: A Description of the Money Market (New York: E.P. Dutton and Company, 1921). [Orig.pub. 1873]

English trade is carried on upon borrowed capital to an extent of which few foreigners have an idea, and none of our ancestors could have conceived. In every district small traders have arisen, who 'discount their bills' largely, and with the capital so borrowed, harass and press upon, if they do not eradicate, the old capitalist.

After all, while the NASDAQ grew at an annual rate of 81 percent in 1999, the NYSE composite index grew just 11 percent. ß----- On what legal ledger?

As most merchants are content with much less than 30 per cent, he will be able, if he wishes, to forego some of that profit, lower the price of the commodity, and drive the old-fashioned trader--the man who trades on his own capital--out of the market.  In modem English business, owing to the certainty of obtaining loans on discount of bills or otherwise at a moderate rate of interest, there is a steady bounty on trading with borrowed capital, and a constant discouragement to confine yourself solely or mainly to your own capital.

After a generation or two they retire into idle luxury. Upon their immense capital they can only obtain low profits, and these they do not think enough to compensate them for the rough companions and rude manners they must meet in business. This constant levelling of our commercial houses is, too, unfavourable to commercial morality. Great firms, with a reputation which they have received from the past, and which they wish to transmit to the future, cannot be guilty of small frauds. They live by a continuity of trade, which detected fraud would spoil. When we scrutinise the reason of the impaired reputation of English goods, we find it is the fault of new men with little money of their own, created by bank 'discounts.' These men want business at once, and they produce an inferior article to get it. They rely on cheapness, and rely successfully.

Nothing new under the Sun and The Fed is NOT Needed and we all know it....

 

cramers_tears's picture

I agree, wholeheartedly.  While Plosser makes a more reasoned and proper definition of the Fed's Acceptable Activities, and points out the difference between monetary and fiscal policy.  Both of these policies could be enacted by Treasury.  If the Fed can enact both monetary and fiscal policy then certainly Treasury could do it cheaper!  Thus eliminating the need for the Fed, period!

And reading Plosser's comments about Fed exchanging MBS to Treasury for TBills/Bonds (which he states @ 1.1 Trillion, btw w/ mark to market suspended), I smell another taxpayer ingestion of toxic crap in the form of "$1.1 trillion in agency mortgage-backed securities (MBS)."  I was wondering when that shit hits the fan.  I've read the Fed is really holding onto more like 2.5 Trillion in toxic crap.  That's how it starts, you hear a little wink and a nod statement like this one from Plosser.  Like I'm hearing from the Repubs - Darrell Issa - "well we should let 'em opt-out of social security"...  Give me my SSA contributions back w/ 6%, give my employer(s) the SSA contributions they've paid on my behalf w/ 6% and I'll call it square.  Of course they can't do that... SSA is broke!

Can we mark-to-market this 1.1 Trillion of crap before the trade?  Can we put-back the really nasty crap to the originators (banks)?  Nah...  we couldn't do that.  Let's just print some more federal reserve notes and run that national debt up to 16 Trillion by December!  I guess it'll be dependent on the new debt ceiling enacted by congress...  If they raise that baby up into the 18-19 Trillion mark, I'm long on Banks and Mortgagers.  Taxpayers will just be able to suck up that 2.2 trillion and GOV INC will still have some wiggle room to get past the 2012 elections.

So what does the investor do?  I'm riding that .DJIA to the moon Alice! I'm not stopping until it hits 20K.

 

Newsboy's picture

Precisely!

I read the entire thread of comments with this in mind, and you saw it, too. There is risk to his precious Fed, while they hold all that toxic waste. There have been predictions from the outset that this would get dumped onto the taxpayers at high valuation before it was declared dead.

He slid this in just before the conclusion after lulling everybody to sleep with sensible-sounding plattitudes.

The Fed wants nice US Treasuries, not vast slag-heaps of MBSs.

I wonder whether the USG will end up holding all the real estate holdings. It makes sense in a twisted sort of way. Then the $US can become a real-estate backed currency, after it implodes as a faith-based currency.

Snidley Whipsnae's picture

Plosser is full of shit!

"How do you use monetary policy to burst a bubble in Las Vegas real estate, where house prices were appreciating at a 45 percent annual rate by the end of 2004, without damaging the Detroit market, where prices were increasing at less than a 3 percent annual rate?"

I will tell you how, you jack ass... You do not make $750,000 home loans, with no down payment, available to people delivering pizzas!

You don't drive interest rates to near all time lows and leave them there till a real estate bubble is so obvious that a moron could see it!

We need to get rid of the Fed. They are nothing but a cancer on America and the rest of the world. They are a bunch of bubble blowing azz hats that shuttle their paid for politicians, economists and bankers between DC and Wall St and do absolutely nothing to safe guard the American Economy...or any economy for that matter. The third and most damaging experiment with a 'Bank of the United States' has ended and it is/was a disaster. Enough is enough.

Mark Medinnus's picture

Reading your comment (which I agree with) answers the question, what's in a name?  This, especially when the name's Snidley, Snidley Whipsnae! Cue the Bond theme. 

Snidley Whipsnae's picture

Snidley Whipsnaed was a movie character portrayed by the great, and now past, comedy actor W C Fields. I did not want to rip off his entire name so I shortened it by one letter. :)

Fields would have understood the motivations of the Fed perfectly since he said in one of his performances "never give a sucker an even break". At least, it sounds like something he said although my attribution might not be correct.

He often played the role of a con man and at times the role of a complete incompetent. He was a very funny man that started in Vaudeville, where the best comedy routines were formed...because they got instant feed back from their audiences.

Mark Medinnus's picture

W C Fields was a comedy great.  Thanks for the info! 

Stuck on Zero's picture

On the surface it appears that the only Fed function is to loot the National Treasury for the billionaires.  The Fed management only has that function.  The purpose of the lofty economics analyses is to make Americans thank that the Fed is genuinely interested in the welfare of the country.  Can anyone think of any other Fed action that speaks of a different motivation?

Snidley Whipsnae's picture

The Fed insures that the gains are privitazed among their cronies and the losses are spread among those in the middle and bottom of the financial chain.

That is their sole purpose, regardless of what you may hear from any in government, anyone on Wall St, any academic economist, or any foundation that purports to have the welfare of America at heart.

The Fed insures that money is made by those in their favor when bubbles are expanding and when bubbles collapse...and that is why the Fed continually blows bubbles by manipulation of interest rates.