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Is it Possible Bernanke Has Seen the Asset Bubble Light?
Marc Faber calls him a dangerous inflationist. Nassim Taleb likens him to an arsonist who now has the task of putting out the fire he started. Despite his mild mannered, soft spoken nature, could Ben Bernanke and his seemingly religious beliefs about financial markets be long term threats to the stability of the US? In general, I worry that his willingness to monetize the US debt has put us on a path to uncomfortable levels of inflation. But, from his comments this morning (as covered by the Associated Press and printed in the NY Times) to members of the American Economic Association, there may be some hope that the events of the past few years have taught him something about the dangers of misguided monetary policy.
First, when I read the headline in the Times I almost fell out of my chair. The article is titled "Bernanke Calls for Regulation to Fight Future Bubbles." Say what??!! You mean that the guy who basically said he did not believe in bubbles was actually advocating some kind of policy response to prevent bubbles? If true, this would be tantamount to Alan Greenspan's recent admission that the financial meltdown had proved to him that the entire framework from which he had viewed financial markets during his career was wrong. That statement is still shocking to me in terms of its magnitude. Kind of like a Minsky Moment, I would deem this a Greenspan Moment. For me, that would be like Warren Buffett, Ben Graham and Seth Klarman being exposed as Bernie Madoff-like frauds. If value investing turned out to be nothing more than an elaborate, multi-generational Ponzi scheme I'm not sure what I would do. I can assure you that getting out of bed the next morning would not be particularly easy.
Could Bernanke really have come to a commensurately game changing realization? I was skeptical but I had to find out. Fortunately, as investors we are blessed by the Fed’s never ending desire to be transparent and the speeches by the Fed governors are posted on its website. Bernanke’s speech starts off in a promising way (for those of us who want to Fed to understand the potential disastrous effects of its decisions):
“Even as we continue working to stabilize our financial system and reinvigorate our economy, it is essential that we learn the lessons of the crisis so that we can prevent it from happening again. Because the crisis was so complex, its lessons are many, and they are not always straightforward. Surely, both the private sector and financial regulators must improve their ability to monitor and control risk-taking. The crisis revealed not only weaknesses in regulators' oversight of financial institutions, but also, more fundamentally, important gaps in the architecture of financial regulation around the world. For our part, the Federal Reserve has been working hard to identify problems and to improve and strengthen our supervisory policies and practices, and we have advocated substantial legislative and regulatory reforms to address problems exposed by the crisis.”
Promising, but not particularly introspective. This paragraph seems to imply that the Fed sees itself as an evaluator of the failures of other agencies and the legislative body as opposed to a willing participant in all of the bubble era madness. This type of dissociation from the systemic problems that have emerged recently is clearly troubling and indicates an unwillingness to seriously examine what role the Fed played in creating the housing bubble and allowing financial institutions it was supposed to be regulating to become levered to the hilt.
“Some observers have assigned monetary policy a central role in the crisis. Specifically, they claim that excessively easy monetary policy by the Federal Reserve in the first half of the decade helped cause a bubble in house prices in the United States, a bubble whose inevitable collapse proved a major source of the financial and economic stresses of the past two years. Proponents of this view typically argue for a substantially greater role for monetary policy in preventing and controlling bubbles in the prices of housing and other assets. In contrast, others have taken the position that policy was appropriate for the macroeconomic conditions that prevailed, and that it was neither a principal cause of the housing bubble nor the right tool for controlling the increase in house prices.”
At least he understands the criticisms that have been thrown so vigorously at the Fed from a wide range of politicians, economists, bloggers and market professionals. Personally, I agree with Bernanke to some extent that interest rate policy may not be the best tool for popping or preventing asset bubbles. To me that would be like trying to tee off with a baseball bat; good luck trying to precisely drive the ball. Unfortunately for the Fed, this does not absolve the members of responsibility for allowing the housing bubble to inflate so dramatically as the Fed was one of the primary institutions in charge of curbing predatory lending and excessive balance sheet growth. Also, with the benefit of hindsight I think it is very hard to argue that the excessively low interest rates in the early part of the decade were appropriate given the macroeconomic circumstances. I am not an economist but it seems logical that historically low interest rates, especially those stemming from the zero interest rate policy in place now, should only be used in very dramatic circumstances.
Not to downplay the significance of the impact of the September 11th attacks or the bursting of the tech bubble but I am not sure that a response to those events that included leaving interest rates under 2% from December 2001 to December 2004 was justified. Bernanke exhausts a lot of energy attempting to defend the monetary policy of this period by citing low inflation and a jobless recovery as contributing factors as well as illustrating how the Taylor Rule that indicated that rates were too accommodative was not the perfect metric. However, my focus is not to admonish the Fed leaders for past mistakes, especially since Bernanke did not become Chairman until 2005. My concern is simple: until the Fed is willing to recognize that there are severe risks to leaving interest rates at depressed levels for an extended period it is likely to continue to play a major part in what I see as a particularly negative perpetual boom and bust prone US economic model.
“To set the stage for the discussion, Slide 5 shows the annual increase in nominal house prices from 1978 to the present.11 After some years of slow growth, U.S. house prices began to rise more rapidly in the late 1990s. Prices grew at a 7 to 8 percent annual rate in 1998 and 1999, and in the 9 to 11 percent range from 2000 to 2003. Thus, the beginning of the run-up in housing prices predates the period of highly accommodative monetary policy. Shiller (2007) dates the beginning of the boom in 1998. On the other hand, the most rapid price gains were in 2004 and 2005, when the annual rate of house price appreciation was between 15 and 17 percent. Thus, the timing of the housing bubble does not rule out some contribution from monetary policy.”
Hmmm, in 2004 and 2005 housing prices were growing at more than twice the rate seen in 1998 and 1999 and at least one and a half times the rates seen in 2000-2003? Shouldn’t that have been a sign that the housing market was getting a bit frothy? Maybe, according to Bernanke, but in his mind the magnitude of increase had nothing to do with monetary policy. Instead he blames it on poor underwriting standards and exotic mortgage products:
“With respect to the magnitude of house-price increases: Economists who have investigated the issue have generally found that, based on historical relationships, only a small portion of the increase in house prices earlier this decade can be attributed to the stance of U.S. monetary policy.12 This conclusion has been reached using both econometric models and purely statistical analyses that make no use of economic theory…”
“The picture that emerges is consistent with many accounts of the period: At some point, both lenders and borrowers became convinced that house prices would only go up. Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages. For a time, rising house prices became a self-fulfilling prophecy, but ultimately, further appreciation could not be sustained and house prices collapsed. This description suggests that regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices.”
Also, Bernanke argues that since housing prices were increasing across the globe during this period, if low rates were the culprit we would expect to see a similar impact across countries. According to Bernanke the data does not support a correlation between monetary policy and housing appreciation but does support a relationship between a global savings glut (and the associated capital inflows from emerging markets) and housing booms:
“As Slide 9 shows [click through to see all of Bernanke’s slides], the relationship between the stance of monetary policy and house price appreciation across countries is quite weak. For example, 11 of the 20 countries in the sample had both tighter monetary policies, relative to the standard Taylor-rule prescriptions, and greater house price appreciation than the United States. The overall relationship between house prices and monetary policy, shown by the solid line, has the expected slope (tighter policy is associated with somewhat slower house price appreciation). However, the relationship is statistically insignificant and economically weak; moreover, monetary policy differences explain only about 5 percent of the variability in house price appreciation across countries.
What does explain the variability in house price appreciation across countries? In previous remarks I have pointed out that capital inflows from emerging markets to industrial countries can help to explain asset price appreciation and low long-term real interest rates in the countries receiving the funds--the so-called global savings glut hypothesis (Bernanke, 2005, 2007)… The downward slope of the relationship is as expected--countries in which current accounts worsened and capital inflows rose (shown in the left half of the figure [see Slide 10]) had greater house price appreciation over this period.18 However, in contrast to the previous slide, the relationship is highly significant, both statistically and economically, and about 31 percent of the variability in house price appreciation across countries is explained.19”
Based on all of this fancy statistical data, Bernanke draws the following conclusions:
My objective today has been to review the evidence on the link between monetary policy in the early part of the past decade and the rapid rise in house prices that occurred at roughly the same time. The direct linkages, at least, are weak. Because monetary policy works with a lag, policymakers' response to changes in inflation and other economic variables should depend on whether those changes are expected to be temporary or longer-lasting. When that point is taken into account, policy during that period--though certainly accommodative--does not appear to have been inappropriate, given the state of the economy and policymakers' medium-term objectives. House prices began to rise in the late 1990s, and although the most rapid price increases occurred when short-term interest rates were at their lowest levels, the magnitude of house price gains seems too large to be readily explainable by the stance of monetary policy alone. Moreover, cross-country evidence shows no significant relationship between monetary policies and the pace of house price increases…
The lesson I take from this experience is not that financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter. The Federal Reserve is working not only to improve our ability to identify and correct problems in financial institutions, but also to move from an institution-by-institution supervisory approach to one that is attentive to the stability of the financial system as a whole. Toward that end, we are supplementing reviews of individual firms with comparative evaluations across firms and with analyses of the interactions among firms and markets. We have further strengthened our commitment to consumer protection. And we have strongly advocated financial regulatory reforms, such as the creation of a systemic risk council, that will reorient the country's overall regulatory structure toward a more systemic approach. The crisis has shown us that indicators such as leverage and liquidity must be evaluated from a systemwide perspective as well as at the level of individual firms…
That said, having experienced the damage that asset price bubbles can cause, we must be especially vigilant in ensuring that the recent experiences are not repeated. All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs. However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks--proceeding cautiously and always keeping in mind the inherent difficulties of that approach. Clearly, we still have much to learn about how best to make monetary policy and to meet threats to financial stability in this new era. Maintaining flexibility and an open mind will be essential for successful policymaking as we feel our way forward.
And there folks, highlighted above, seems to me to be a bombshell. Just the hint that monetary policy could be used in the future to address the risks associated with asset bubbles appears to indicate a very positive evolution in the thinking of the Fed Chairman. Over the last year I have read the majority of his speeches and correct me if I am wrong, but I do not recall him ever been this forthcoming and open to adjusting Fed strategy when it comes to asset bubbles. Was this Bernanke’s Greenspan moment? Does this mean the Fed is going to be much more aggressive in raising interest rates this time around? Are those worried about rampant inflation or even hyperinflation going to be proven wrong as a result of a new Volcker-like philosophy coming from Bernanke? I am skeptical based on his historical bias towards inflation, his extreme fears of deflation, his desire to prevent another deflationary Depression, his staunch defense of past Fed looseness, and his beliefs about the impact of monetary policy on the housing bubble. But, those final words provide me with a modicum of hope that I sure did not have when I woke up this morning. Maybe 2010 is going to be a better year than I have been anticipating.
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Just more jawboning from the Bearded One.
I stated typing a longwinded reply but deleted it all, useless. Gold is the only arbiter (actually, other PM & commodities too) in this game and fortunately for us he has lost control. Everything he is able to control is not worth controlling, and vice versa. So yes, SP could go to 50k, but who cares anymore?
"Can a leopard change it's spots, or the Ethiopian his skin?"
BB is a serial printer, as Faber says. It is all he knows. He throws a bone to his critics here in order to get re-appointed. Don't fall for it, dude.
Between the lines:
When the next crash occurs, I can point to this speech and say it was due to failure by Congress to set up the right regulatory and supervisory policies. If inflation goes into overdrive, I can point to this speech and say the failure by Congress is the reason I have to raise interest rates.
To Ben Bernanke and the Fed - SHOW ME THE MONEY!
They are all crooks! Not to preach to the choir, but imagine the world series of poker when the self proclaimed winner didn't have to show his hand. How could he lose!?
This banking cartel of the elite has to end!!
Ben, I've read your hand and I'm calling your bullshit!
Down with the Federal Reserve Bank of Fucking Thieves!
The answer is "no", Bernanke has not seen the light.
He thinks he can control the world markets and economies by adjusting his Fed levers.
No offense to the author, but your tentatively optimistic spin on these statements betrays some naivety on your part. In other words, this guy (BB) is a professional liar. Are you kidding me? I want to make some joke like "Lay off the hopium," or "I have a bridge for sale, and I'm looking for some buyers." However, this isn't funny and I'm tired of making light of it. Unfortunately, this whole situation isn't a joke. I wish it was. It's as serious as a crutch.
Helicopter Commander Bernanke does what he is told to do ,just like the weasle before him Easy Al.
He talks with the same inscrutable words as Greenspan.
Leaving open every possibility and in the end, saying fuck all.
Why give this premier insider anymore ink than he has garnered so far.
I have ignored everything he has said, never read his comments or reports. And nothing much negative has happened as a result of this willful ignorance.
Watch what he does, not what he says.
Looks to me like Bernake is afraid of the bond market dsilocating too much and is using verbal intervention to raise the Fed's credibility. Of course when it comes to action, we are talking peanuts but even that may be enough to control asset prices this time around.
That video on youtube of Bernanke making all those statements about housing not being a bubble and then saying it would be a minor correction are classic. He reminded me of Baghdad Bob saying the Americans had been repelled when they overtook Baghdad just hours after he was giving his statement.
If you are willing to accept that Bernanke is capable of learning from the past crisis, you are implying he was simply guilty of bad judgement. I think you are being overly optimistic in that you still believe that the Fed is interested in doing the right thing. These guys aren't that daft. They know exactly what they are there for and it isn't for our benefit.
You're optimistic because a Keynesian apparatchik is equivocating on his alleged concerns and solutions? This must be the first Bernanke speech you have ever read.
Here's a less than optimistic take on the same speech: http://globaleconomicanalysis.blogspot.com/2010/01/ben-bernanke-looks-in-mirror-sees.html
From the article:
Exactly my thought upon reading Bernanke's speech, he is intending to fight the bubbles, but is using benchmark which doesn't factor in asset prices. However, even using vastly understated government-manufactured CPI, according to the Taylor rule, monetary policy was too accomodating and yet he claims monetary policy didn't cause housing bubble. He simply didn't present enough evidence for this.
The Taylor Rule is a joke, if for no other reason than the fact that the variables that are input into the Taylor rule are arbitrarily 'massaged' by the Government.
Great piece holmes.
I agree, rate policy is like hitting a golf ball with a bat, truly.
Underwriting standards etc. is the main culprit, very true. HOWEVER, we would have never had people claiming they make 5k/mo. working at Huck's if rates were not obnoxiously low!
Another thing I think about it demographics...I'm a gen x'er and when we all graduated from school and needed a crib, there was a lot of people in the same boat.
Still, 15-17% increase...
Ben needs to raise rates now. Period.
I suppose that the change in capital gains tax on the sale of a residence had nothing to do with the housing bubble!
"However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks--proceeding cautiously and always keeping in mind the inherent difficulties of that approach."
Huh? Adequate, but prove insufficient? Isn't that still inadequate?
If you suspected he was stupid, but were put off by the depth of his bullshit,
a failure of simple logic is reassuring!
What Bernanke totally misses....
Here is the primary equation....
What makes for a bonified healthy economy ?
A sustainable and complete business estuary of continuing and optimally high cumulative valuations....
Got that ?
Next....
What govt. policies could be changed that could effectively enhance a TRUE real market economy ?
Answer: Tax structure and size of govt.....
Has this been addressed ?
Answer: Yes....the govt. wants to increase taxes while increasing the size of govt...while the tax base is being diminished....
What policy should be immediately put in place ?
Answer: A 15% Consumption tax only.....10% states....5% Fed....and absolutely no other taxes....
Result ?
Business valuations increase in number and size in dramatic fashion....replacing in an ongoing sustainable way....the capital lost in artificially high Real Estate prices....
..............................
Make no mistake.....
This is the way to go .....
Simply compare and examine all current policies with this prospective change ....look ahead....
What do you see ????
Sure: it's possible Chopper Ben has seen the asset bubble light.
It's also possible pigs will sprout wings and take to the skies.
Either way, methinks it best to have a sturdy umbrella handy.
Meanwhile, the DJIA and SPX bubbleth over as Chopper Ben speaks :>)
Yep - still partying like it's 1999, I see.
Same sh*t, different year.
Dreamer.
First, Bernanke did not even address or hint at the Fed's role in getting us to the spot we were in in 2002 - we were already on a bubble roller-coaster.
Second, he spent a long time 'proving' that he couldn't have seen or addressed a bubble because the Taylor rule 'prevented' him from doing so.
Third, he clearly said this is an issue for regulators, not the Fed - they should fix a problem that Bernanke and the Treasury could not even see and did not acknowledge.
This was an elusive, disingenuous, 'not my fault' excuse-making speech and nothing more. Nobody - NOBODY - in this government is going to ride to the rescue to control bubbles until the day somebody new is in control.
I watch, wait, read, wait, listen, hope. Not one "economic" site has the fact-THAT the retirement portfolios of the JUDGES were all "traded-out" without oversight and without any curiosity? from our JUDGES. Yes, folks, our flesh is traded in the exchanges of those who RULE as "Birds on a Wire." AND just like Bernanke these great intellectuals, scholars (same cloth they all wear it appears to be so) THE Doctorates of Jurisprudence are awaking to the reality they've been screwed too in the ASSET BUBBLES. How? Well golly gee their retirements have gone PoP Goes The Weasel!
WONDERING about anymore asset bubbles Mr. B? Oh LOL.
Review every Judge portfolio in the US because they are vested automatically into the digit head system of who do we cheat 'em and how, too.
INSURANCE INSURANCE INSURANCE IT IS ALL ABOUT THE INSURANCE IN EVERY JUDICIAL AND GOVERNMENT "EMPLOYEE" RETIREMENT PORTFOLIO.
Sabre International and TASER International too:
"... Federal court restricts Taser use by police Ninth Circuit ruling -- allowing an officer to be held liable for injuries a man suffered after being Tasered -- sets a precedent that may force agencies to revisit their policies."
OOPs for the insurance policy writers (Buffett, et al.) this is not good news. Those portfolios have once again dropped out of the bottom, just like what happened when the subprime toxic bonds were traded for the municipals, etc. and our judicial lost their lofty tax cult positions of siphoning the wealth left over after the rape, pillaging and plundering by our own colonialists since ...
Read F. William Enghdahl's new book coming out and the THEFT OF OUR AMERICAN "NATION" began before Abe Lincoln and this is just the final coup d'etat.
Here's HOPE, however:
VIDEO: Exposing The Bush-Cheney Cabal: Exclusive Footage of an Attempted Citizen's Arrest of G.W. Bush
by Splitting The Sky
http://www.globalresearch.ca/index.php?context=va&aid=16745
EXPOSE OUR JUDICIAL SYSTEM FOR BEING COMPLICIT. Without doing this (simply pull the SEC info, etc. for each state, it is not difficult to track and trace PERS in Oregon) we are impotent chump change for the continued give-away of America's freedom.
In 2006 Bernanke was asked whether he believes that there's a bubble on the real estate market and whether it's going to pop at which he answered: "I guess I don't buy your premise, because real estate prices never went down nationwide", he said that despite the fact that some people were already predicting the collapse of it.
Now, here we are in 2010 and he is telling us that low interest rates weren't the primary cause of the crisis and it was a result of the lack of the regulation. He also stated that crisis was hard to predict, due to the complex nature of financial markets.
Now, the only question that is left - how on Earth you are intending to regulate markets, which behaviour you cannot predict or fully understand, when you already failed at predicting the previous crisis and admitted that?
Maybe senator Benning was right and it is time to go back to Princetone to study one more time causes of the Great Depression? Oh wait, you were reappointed for another term meaning you have another chance to fail at everyone else's expense.
Ben Shalom Bernanke "You Are the Definition of Moral Hazard"
www.youtube.com/watch?v=FvgdX58Ii7c
End The Fed!
Goldman Sachs Conspiracy: The proof is in “The Partnership.” Please send this to someone who will help me get out of jail when the FED comes a lookin for me. Or someone who understands hi finance.
The fact that Goldman Sachs re released their book, one year after it’s original copyright date of Sept of 2008, in response to conspiracy theories, proves that the theories have some validity. It’s suspicious enough that the book, a 100 years in the making, was released just one month before the stock market crash. Yes, in the newly revised “Introduction” chapter, Goldman Sachs uses the word conspiracy. I am thrilled that the few of use that wrote on the subject had such an impact that Goldman Sachs found it nesscecary to re release their book.
They also added a last chapter entitled “A Perfect Storm” of course after they could see how Paulson’s inspired plot to crash the markets, and then loot the US Treasury played out. This new last chapter (released one year later) is preceeded by a chapter entitled “Before the Storm.” How cute is that? “Before the Storm” and a “Perfect Storm.” Well get this.
The 1st version came out one month before the stock market crash, and so them using the title “Before the Storm” many months before the crash, making Goldman look a hell of a lot smarter than anyone else. And the fact that they used the word “Before” in the heading of the last chapter of the book, insinuates that they were planning to re release their book after the crash,
Patrick the PAINTER
+100.
He has zero credibility. I would like to put him under thruth serum and see what he really thinks....
I suspect the answer is lets save the big boys and everyone else (middle class) can pack sand.
I wouldn't be suprised if he rehashes the same nonsense under the truth serum. Don't underestimate people's ability to willfully deceive themselves, even if the truth (no matter how obvious) is contradictory to one's deep rooted belief system.
"I know that most men, including those at ease with problems of the greatest complexity, can seldom accept the simplest and most obvious truth if it be such as would oblige them to admit the falsity of conclusions which they have proudly taught to others, and which they have woven, thread by thread, into the fabrics of their life." - Leo Tolstoy
I have said this from the beginning. Ben is in the process of having the last lingering doubts removed as to what caused the Great Depression. ( Keynes and the money machine ) Soon a quick look in the mirror is all Ben will have to do, to find the cause of the second Great Depression. The guilty victim, finger pointing
that Bernanke is doing, is part of the process. It's what control freaks do when they fuck-up.
Here it is.......
Bernanke misses the most key points....
Here are his beliefs....
There is a country that has $1 Trillion regarding its own citizens....
Interest rates are 4%.....
Now.....Housing quantity effects....
Another country's citizens inject another $1 Trillion....
Result : Housing quantity goes up....at 4%....
Interest rates goes to 10%....
Result: housing quantity goes down....
.................................................
The real issue at hand is the question of globalization
and its effects....
Think about it....
.................................................
But write this down....
Interest rates at a govt. imposed 0% creates bubbles in every asset class....versus an interest rate of 10%....
And the regulation of limiting the number of houses
would only just limit the number of houses....not the price....
Bernanke .....and govt. impositions in general only serve
to distort price normalities....
Bernanke is essentially addressing his critics and saying that acommodative monetary policy is
a. not to blame for the excesses of the last decade
b. monetary policy punches will therefore not be pulled due to fears of creating new bubbles.
No need to sell your gold, i.o.w.
Price
If he sees the light at this point it is merely tragic, because the die has been cast.
Bernanke's excuse for lying is "maintaining confidence". Telling the truth would cause a panic. He justifies inaction by claiming to not have had authority to do anything. The FED is without blame for the bubble. He attempts to consolidate power within the FED.
Bernanke's fault is hubris. He believes that he knows everything as he understands history. He misses something important. Policy makers have always believed that they understood the past. They always make new mistakes by not understanding new "innovations". Bernanke must admit to himself that his metrics didn't explain everything and his available "tools" are incomplete. Wall St. crooks will take advantage of these tools when the FED attempts to reduce liquidity eventually. Some surprises will occur.
So... Inflation vs Deflation.
Either way, the U.S.A. gets screwed. Nice choice.
Oh, and:
Wait a couple more years -- we are getting there.
Happy New Year!
Anton,
You are a moron.
"Fortunately, as investors we are blessed by the Fed’s never ending desire to be transparent,.."
I got sick when I read that,.. and since I failed to see it as sarcasm,.. I have to call this article BS.
Ben and the administration would say the moon is made of cheese if it served thier purpose.
M. Copenhagen