Bernanke: There's No Housing Bubble to Go Bust (2005)
washingtonpost.com
washingtonpost.com
There's been a narrative developing lately that none of the mainstream economists saw the crash coming. This is not true; plenty of them did. But their message did not appeal to incumbent politicians, and so it was ignored.
Likewise, there were many people who saw the 2008 pop coming and bet on it, but just mistimed it by a few months. The handful of Wall Street guys who timed it just right made their careers and look like geniuses, but there were numerous times that many people who took massive hits because they were just a few months too early.
The point is, the doomsday message is never going to appeal to incumbents, because it's pretty hard to know where you are in the bubble. If you're only in the middle and you start jacking interest rates up (prolonging the bubble but not popping it), its very likely that it will look like you made the wrong move (after all, prices kept going up the whole time, regardless of the rate increases, so maybe it wasn't a bubble?) Greenspan was a genius ... until 2.5 years after he stepped down. Now he gets a large part of the blame for causing the bubble.
We're in another real estate bubble right now. Guaranteed. My so-cal house is up over 20% just in the last year (after only falling about 20% from its 2008 peak), and things are only accelerating in my area. But real estate is basically the only thing driving the economy, so there's no way they're lowering rates in the next two years, so there's no way prices are falling. Asset prices overall are going to skyrocket over the next few years, and then will crash again, probably close to as hard as in 2008. But whether that crash is 3 years out, 5 years out, or 10 years out, I have no idea. Nobody does. So if you're a politician, the safest bet is to ride the wave and just hope you don't get smashed into the rocks.
>Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.
The only economy that never suffered as badly as everybody else in that list is Australia - and MAYBE New Zealand - largely because of the ridiculous demand of commodities from China, et. al.
But these guys were spot on.
No wonder I can't stop reading them every week.
I wonder if a fed chairman who does foresee financial bubbles collapsing would actually be able to say so publicly. The fed is supposed to be immune from lobbying and political forces in theory, but I wonder what the chances are for someone to bow to the social pressures and pretend like everything is just toally fine.
In fact, how long has it been since we've had a high ranking federal reserve official actually forecast economic doom? I'm not saying that such officers will never say something negative when the public signals are all green lights, but I can't help but think that there is some skew towards optimism in public comments.
http://blogs.telegraph.co.uk/news/davidhughes/100087136/he-m...
Hilariously, Schuller went on to say that being caught out lying in this way would not undermine the market’s confidence in future eurozone pronouncements – because it already had no confidence.
The economy is largely about psychology and perception. If someone in a position of authority stands up and says that the sky is falling, they can cause the sky to fall even if it wasn't about to.
It is the same problem as the classic run on the banks. Even a fundamentally healthy bank is going to be in trouble if everyone asks for their money back at once.
So if you aren't one of the well connected people, it pays to be a little paranoid and be first in line to withdraw your money while you can. It's kind of funny, the rational action for any individual is not to keep most of their money in a bank where it is at risk of going away with zero notice. The confidence of the banking system relies on everyone being irrational!
In an economy where perception is reality - if the central bankers and main regulators start screaming that the house is going to burn down...guess what happens....exactly.
So if they think the house may burn down....they have no choice but to lie to stave it off as long as possible.
More generally, public statements are an important policy instrument for the fed. A lot of macroeconomic research in the last 30 odd years has focused on the importance of people's expectations about the future and how traditional monetary and fiscal policies work once you take into account how they affect people's expectations. For example, the government giving everyone $1,000 may not increase spending today if people expect that this government expenditure will lead to higher taxes tomorrow.
So the fed has to take care and think about how what they say and do will affect people's expectations. As another example, right now we're in a situation where it is hard to the fed to lower interest rates because they are already basically at zero. One thing that they could do is say and do things to make people believe that we will have higher inflation in the future. This should spur companies to make investments today rather than hold onto their cash.
This isn't to say that the fed can say anything and people will believe it. What the fed says has to be credible. There is a lot of interesting research that looks into this issue and shows what it means for the kinds of policies the fed can or should adopt. The 2004 nobel was awarded in this area -- the nobel page has a lot of good information: http://www.nobelprize.org/nobel_prizes/economics/laureates/2...
Right now I'd say there definitely isn't one and house prices will rise for a while, even if prices are really at bubble levels. However, the economy is not doing well, so people will notice they can't actually buy "non-"bubble priced houses, and Bernanke can only hold back public opinion for so long.
http://krugman.blogs.nytimes.com/2011/12/15/inflation-predic...
PAYNE: So, where are you then, Peter, with respect to inflation? Do you think this is going to be the big story of 2010?
SCHIFF: You know, look, I know inflation is going to get worse in 2010. Whether it’s going to run out of control or it’s going to take until 2011 or 2012, but I know we’re going to have a major currency crisis coming soon. It’s going to dwarf the financial crisis and it’s going to send consumer prices absolutely ballistic, as well as interest rates and unemployment.
PAYNE: And what does that mean? For people watching this show, what does that mean for the average American?
SCHIFF: It means their life is going to get a lot more difficult. It means things that they need to buy, things like food and energy, are going to be much more expensive. Ultimately, interest rates are going to rise and their entire standard of living is going to plunge.
And I’m hoping the government doesn’t respond to this inflation with price controls because that’s going to make it even worse. Now, you’re going to be waiting in long lines to get basic food items or to get energy because there’s going to be shortages. People might be going to the black market.
PAYNE: You’re talking you’re talking Zimbabwe, Weimar, Germany — I mean, you’re really talking about something like that actually happening in this country.
SCHIFF: It will happen if we don’t change policies. There is still time to change.
PAYNE: Right.
SCHIFF: I mean, I’m running for the United States Senate, so I can try to change that myself. But if we don’t reverse course, if we continue to stimulate, then we will end up with hyperinflation and it will be like Zimbabwe.
Peter Schiff's focus is long term trends. He's constantly saying it's impossible to forecast exactly when the bottom will drop out. Just that it will if we continue down QE infinity.
That seems sensible. How can endless money printing end in anything but inflation?
"How can endless money printing end in anything but inflation?"
Because it's not really "endless" or "infinite"? If you want to be taken seriously engage with the real policy of QE, not some caricature. Seriously, it's not hard to find explanations of why there's below average inflation despite a tripling of the money supply.
Sure, if we continue QE when the conditions on which QE is premised go away, that would be expected to produce potentially substantial inflation. But the reason QE is continuing is the existence of precisely the conditions (with regard to extensions of credit and resulting demand) that indicate that QE will not cause inflation. Were those situations to end, QE would be terminated, since the entire reason that QE is being done would no longer exist.
> That seems sensible.
To the extent that it is sensible, it is irrelevant to the real world, since the policy isn't "QE forever ignoring actual conditions relevant to inflation". To the extent that it is a criticism of actual real-world policy, it is not sensible.
> How can endless money printing end in anything but inflation?
Quite easily.
First, money printing can fail to lead to increases in the effective money supply if banks destroy money but not extending credit as existing credit is paid off in a quantity which offsets the increase in the money supply that would be expected due to printing. (This is basically the QE situation.)
Second, even beyond that, expanding the money supply that is actually chasing goods and services isn't expected to lead to inflation if the rate at which the supply expands is less than or equal to the rate at which new goods and services for it to chase are created. So, depending on the rate of money creation, increases to the money supply can continue forever without any expectation of inflation. (This is why, if you don't want deflation and don't have declining production, you need some money supply growth under normal conditions.)
The Fed is printing lots of money. (And so is China and Europe)
The money supply is growing much faster than usual.
That can lead to hyper-inflation.
Would I talk with his style and confidence? No. Should you flat out ignore what he says? No
Flagged.
[1] off the first page (2nd page mostly dead links, idk what that's about):
What’s Behind the Crash in the Gold Market? (time.com)
No Housing Bubble Trouble (2005) (cato.org)
Gold prices dive 5% to $1,487 an ounce (usatoday.com)
RonPaulCurriculum.com (ronpaulcurriculum.com)
Texas wants its gold stored in the state, not at Federal Reserve in New York (bostonglobe.com)
Petition: Pass a global wealth cap of $1 billion per US citizen (change.org)
Elizabeth Warren's Unwarranted Wage (mises.org)
Could you please explain that?
Take your choice. Small wonder that prices were rising like crazy (how can that -not-be a bubble? given the history of RE prices over the previous century) when anyone with a pulse could get a loan. And oh how they got away with it.
>"Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn"
I've heard this from various corners as well, and it utterly amazes me that there are people who would actually try to claim that with a straight face. There certainly was plenty of warning of the housing bubble both in the mainstream press and elsewhere. Here are just a couple of examples:
The Economist called it "the biggest bubble in history" in 2005:
http://www.economist.com/node/4079027
And here is a blog which goes back to 2004 dedicated to discussing the housing bubble:
http://thehousingbubble.blogspot.com (original site)
http://thehousingbubbleblog.com (post-move site)
http://en.wikipedia.org/wiki/United_States_housing_bubble#Id...
In short, it's quite obvious that plenty of people "saw it coming", and anyone trying to claim otherwise is just desperately playing the CYA game.
Otto von Bismarck
(also attributed to others as is every good quote)