It took a room full of PhDs and a huge staff this long to conclude that the housing bubble was 1) a bubble and 2) enormously destructive?!
These guys surely knew about the problems long before, but their political masters prevented their lapdogs from baring any teeth. A bit of yipping was allowed. But no teeth and certainly no real bite.
I think these clowns are now trying to protect their professional integrity from the scathing criticism of their peers that is sure to come.
dryfly, this is an amazing admission that they were wrong (they were wrong about the stock bubble too - but they haven't admitted that yet). I'm going to write something later.
I'm forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.
Fortune's always hiding,
I've looked everywhere,
I'm forever blowing bubbles,
Pretty bubbles in the air.
I'm dreaming dreams, I'm scheming schemes,
I'm building castles high.
They're born anew, their days are few,
Just like a sweet butterfly.
And as the daylight is dawning,
They come again in the morning!
The dot-com bubble could've been prevented through sensible regulation, too.
It fascinated me the sea-change that occurred regarding IPOs. Used to be a company that wanted to go public had to endure a rectal exam similar to that of prospective homebuyers -- cash in the bank, growing income, stability, etc. Then, somehow, Wall Street is magically underwriting "businesses" that had history, no profit... hell, no proven model whatsoever. Pure snake oil.
Joe investor goes "hey, these guys wouldn't let'em IPO if they weren't legitimate" (because they never had before), "so they gotta be good!"
They should've put iron bars around Wall Street after that episode. Instead, a few years later we watch lending standards disappear just as the IPO underwriting standards had vanished before them.
"Were very sorry. But thanks to you, we wont do it again." ( Uncle Ben talking about the Great Depression with Milton Friedman).
Maybe I am wrong, but this guy looks like a very dengerous ideologist to me.
What'll really come back to haunt the Fed is the reduction of banking reserve requirements through "sweeps", etc. Our trillion dollar financial system is balanced on the head of a pin in terms of real cash reserves.
We at the Fed like some bubbles but not others, and right now we think we want to try and pop a commodities bubble cause it would be bad, but we kinda liked the .com bubble, and well, the housing bubble, we're shit outta luck on that one.
The problem with moving to the pornography view of bubbles - regarding real estate anyway - is not with the "I know it when I see it" 'rule' but those community standards: you don't want anyone to recognize you lurking about some seedy, back alley area zoned for mortgage brokers.
Funny thing is that the "commodities bubble" is nothing of the sort. If anything, it's a currency bubble (as ac so often points out), and that's also the Fed's fault.
"El Cliffo writes:
" . . .the housing bubble of this decade was the type of bubble that should have been targeted with closer supervision and tighter regulation"
Weren't higher interest rates the only supervision or regulation they needed?"
All the Fed could do on the interest rate is raise the front of the yield curve. With the flood of money coming in from Asia, all that would have just meant the yield curve was flatter and you would have had lower long term rates. The bubble would have been fueled with fixed rate mortgages instead of floaters. Remember the "conundrum"?
That's why they argue that they needed better supervision. The bubble was inevitable given the pattern of international financial flows, all they could do was to try to keep some people out of harm's way.
If the bubble were to be stopped, trade policy would have had to be tightened, to prevent the inflow of cash.
"Emma Anne writes:
So by regulation, what does he mean:
(1) margin limits
(2) reserve requirements for shadow banking entities
(3) regulations on mortgages themselves?"
All of the above, although (1) would have been applicable to the stock market bubble in 2000. And the mortgage regulation would probably have involved scrutiny of the lending practices more than disallowing products outright.
Whether the Fed has a legal mandate to do all that is unknown; they certainly did not attempt to do test the limits of their powers under the Greenspan Fed.
That said, if they tried, the real estate industry would have burning the Fed Governor in effigy.
The trade deficit sent dollars abroad and mortgage securitization gave the opportunity to foreign holders to invest in housing, which always goes up, rather than stogey TBills at 3-4%
BTW - trade policy wouldn't necessarily have to have been changed - but the flood of easy money coming in to replace the 'trade CAD' going out would have found a different home had mortgage origination regs remained as tight as past generations - that money would have flowed into stocks, treasuries and tightly regulated agency - but not necessarily the current highly unregulated subprime.
The result would have been similar though - a bubble somewhere until the Asian merchantilists threw in the towel & let their currency float and correct the CAD imbalances via dollar depreciation (inevitable).
I'd LOVE to hear the Fed Gov's address that one... not much they could've done but it sure would have been fun watching them admit impotency.
All assets have long term trend lines. When prices rise above the trend the solution is simple, slowly increase margin requirements to reduce borrowing that fuels further price increases. In the case of housing, simply increase the down payment required... if we are at an already low 5%, go up 1%/month until we get to at least 20%. It is logical to reverse course when prices go under the trend.
Such a policy does not either boost or cut prices on its own, just avoids excesses.
The Fed should please commit ritual suicide. That is what the Fed should do. Seppuku.
Of course, why anyone is really shocked by all this is beyond me. The housing and credit bubble, including the greatest transfer of wealth from the lower to upper classes in world history, was brought to you by the same folks who:
Invaded and occupied Iraq on the basis of lies, killing millions and spending trillions to make Dick Cheney and Carlyle Group mega rich.
Supported the "two great democracies of the Middle East", Israel and Pakistan. Mmm, terror, holocaust, concentration camps, human trafficking, war. And then there's Pakistan.
Shredded the Constitution. Just a "piece of paper". Wire tapping, waterboarding, kidnapping, torture, illegal imprisonment.
Lied, stole, obfuscated, and pardonned themselves when caught.
Spent trillions on the War on Drugs, putting millions of Americans in prison and bribing hundreds of officials. Result? Lowest street prices for drugs in a decade. Just Say No to the War on Drugs!
Is America better than most countries? Yes, of course. but that argument is specious and beside the point. America is not a democracy, it's a hypocracy.
Add this to your list of "What we 'got' from the Housing Bubble" :
-Massively, obscenely overpriced homes that NOBODY, including the "rich"!, can afford.
-Societal disruption from wrecked neighborhoods, foreclosures, because NOBODY CAN AFFORD these homes.
-A complete and utter trouncing of ethics and morality when everybody jumps on the "it's not a home- it's an ASSET!!!!!" bandwagon.
Oh yeah and now let's add food and fuel inflation to the mix while these a$$holes at the helm trash the dollar in their effort to KEEP homes UNaffordable.
LOL. You're right. Screwing people out of a decent place to live at a price they can afford is one thing... ....But the Fed would never actually sit by and "monitor the situation carefully" as people starve or riot over food.
Local grocery store shelves empty out in half a day now whenever a specific item goes on sale. At least they're still issuing "rain checks". Wonder how long that will last.
Oh, I thought it was just wide spread wealth creation via no form of productive action on the part of the individual. Just pretending that everybody is richer doesn't produce more oil or food? Next you are probably going to tell me that my lunch isn't even free.
There seems to be a theoretical/ideological factor at work. I had a go-'round with David Altig (Chicago school, now back at the Fed (Richmond)) on his (now long dormant) macroblog macroblog about a year ago on this topic.
He was adamant that it just wouldn't be right for economists to interfere in the market's determination of asset prices.
Greenspan had the same ideology -- that economists couldn't possibly know the proper prices of assets better than markets.
Expat wrote: The housing and credit bubble, including the greatest transfer of wealth from the lower to upper classes in world history, ...
But the largest fraction of the wealth transfer was not to the upper classes, but to the construction workers, building material suppliers, and the people cashing out through the housing ATM.
The horror is that to rip off a few hundred billion in bonuses, the Wall St. crowd lent literally trillions of dollars that went into building housing of types and quantities we didn't need, and into luxury consumption by the housing ATM folk.
In the suburbs of Chicago, the bubble resulted in the destruction of much good, affordable housing in order to get lots on which to build million-dollar McMansions. The teardowns weren't decrepit or derelict -- they were well-built, 3-bedroom, 2-bath suburban homes in good condition, around 1800 sqft. Their replacements? 5000 sqft monstrosities.
While we shriek at Mishkin, it might also be worth noting the extraordinary change this represents. Under Greenspan (and most recent Treasury Secretaries, Republican and Democrat), the idea that greater financial regulation might be a good idea was not looked upon favorably. Without that tool, all that was available was rates. Setting rates to deal with a bubble has the same drawbacks as setting rates to deal with a single commodity price - it puts the hurt on everything else to deal with that single problem. A refusal to consider regulatory measures meant dealing with a bubble was a practical impossibility.
bond guy and dryfly seem to argue that it is a political impossibility, so that the shift in regulatory thinking is going to prove inoperative. Could be. But at least the Fed guys are continuing to rethink the world. There has been a lot of that under Bernanke. While that is going on, we might want to stop tarring this Fed with the same brush as the last. The "great man" model of central banking is evaporating as we see the impact of Greenspan's efforts. We may find we like the technocratic model better. May as well give it time, because the Fed is the only central bank we've got.
And it doesn't matter. I am sure that if they can succeed in ramping up the Housing Bubble again, it will somehow become "a vital part of repairing our economy." And they have yet to do anything about the collapsing dollar that has helped create the commodities Bubble. But starving people are fine to the Fed and their masters, so long as it is the "little people" starving.
Low, stable inflation and sensible, consistent regulation.
Oddly enough, exactly the same things the Fed should be going for when there is not a bubble.
The point isn't that the Fed should do nothing when there is a bubble, it's that they shouldn't try and use a good economy as an excuse to avoid their responsibility.
If you're not artificially propping up the money supply and you're taking the whole 'safety and soundness' thing seriously to begin with, then "Let the market work it out" is a perfectly sensible response to whatever bubbles occur.
The only regulation the fed needed was of its own dollar printing presses.
It still doesn't get it. Now the bubble is in foreign currency, oil and food.
If "A" (too much money) causes "B" (asset inflations) then the way to get less "B" is to cut back on "A". Instead the fed, ever mindful of the short term, just keeps those "A" presses running.
Fire Bernanke now.
Wow if that isn't a collective mea culpa I don't know what is.
Mishkin -- What an effing spineless jackass.
It took a room full of PhDs and a huge staff this long to conclude that the housing bubble was 1) a bubble and 2) enormously destructive?!
These guys surely knew about the problems long before, but their political masters prevented their lapdogs from baring any teeth. A bit of yipping was allowed. But no teeth and certainly no real bite.
I think these clowns are now trying to protect their professional integrity from the scathing criticism of their peers that is sure to come.
Oh, yeah. What a jackass.
dryfly, this is an amazing admission that they were wrong (they were wrong about the stock bubble too - but they haven't admitted that yet). I'm going to write something later.
Best Wishes.
At least we got some technology out of the dot bomb bubble. What did we get out of the housing bubble?
Excess homes
No technology that can be exported
Mis-allocations of natural resorces
Nice job boys!!!
At least we got some technology out of the dot bomb bubble. What did we get out of the housing bubble?
True. That Pets.com sockpuppet made a great carwax buffer.
they are wrong about stock market now too.
but wait, we do need bubbles, life is boring without them
I guess they now need to fifure out a way to determine if something is in a bubble because they sure denied the housing bubble up to the bitter end.
I remember Bernanke saying something about how fundamentals supported housing prices at the peak.
Hey, it's not like we got nothing out of the housing bubble.
We got some new additions to the vernacular, like "McMansion", "Just walk away" and "Suzanne researched it."
Not to mention those waycool orange Countrywide "Save our house" arm bands.
Sounds like a buy recommendation to me. Leverage up.
were wrong about the stock bubble too
stock bubble, what stock bubble. fair value says it's underpriced.
the ten year real yield is negative, which means stocks can be priced at infinity.
no bubble
Will we get another Fed board plus Mortgage Pig cartoon?
Next bubble (if there is one) will be in alt. energy. At least I hope so.
Like the dotcom bubble, at least some good will come of it.
I'm forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.
Fortune's always hiding,
I've looked everywhere,
I'm forever blowing bubbles,
Pretty bubbles in the air.
I'm dreaming dreams, I'm scheming schemes,
I'm building castles high.
They're born anew, their days are few,
Just like a sweet butterfly.
And as the daylight is dawning,
They come again in the morning!
The dot-com bubble could've been prevented through sensible regulation, too.
It fascinated me the sea-change that occurred regarding IPOs. Used to be a company that wanted to go public had to endure a rectal exam similar to that of prospective homebuyers -- cash in the bank, growing income, stability, etc. Then, somehow, Wall Street is magically underwriting "businesses" that had history, no profit... hell, no proven model whatsoever. Pure snake oil.
Joe investor goes "hey, these guys wouldn't let'em IPO if they weren't legitimate" (because they never had before), "so they gotta be good!"
They should've put iron bars around Wall Street after that episode. Instead, a few years later we watch lending standards disappear just as the IPO underwriting standards had vanished before them.
" . . .the housing bubble of this decade was the type of bubble that should have been targeted with closer supervision and tighter regulation"
Weren't higher interest rates the only supervision or regulation they needed?
"Were very sorry. But thanks to you, we wont do it again." ( Uncle Ben talking about the Great Depression with Milton Friedman).
Maybe I am wrong, but this guy looks like a very dengerous ideologist to me.
Its a start. Now, if only Mishkin would admit that the Fed caused the bubble in the first place...
What'll really come back to haunt the Fed is the reduction of banking reserve requirements through "sweeps", etc. Our trillion dollar financial system is balanced on the head of a pin in terms of real cash reserves.
to me he is saying:
We at the Fed like some bubbles but not others, and right now we think we want to try and pop a commodities bubble cause it would be bad, but we kinda liked the .com bubble, and well, the housing bubble, we're shit outta luck on that one.
The problem with moving to the pornography view of bubbles - regarding real estate anyway - is not with the "I know it when I see it" 'rule' but those community standards: you don't want anyone to recognize you lurking about some seedy, back alley area zoned for mortgage brokers.
Funny thing is that the "commodities bubble" is nothing of the sort. If anything, it's a currency bubble (as ac so often points out), and that's also the Fed's fault.
tj, I agree. If they tried to institute some kind of bubble popping policy going forward though, I think that's where they would try to start.
Gosh, the only thing I can imagine worse than a houseing bubble is a food bubble. But they won't let that happen.
These guys are jackasses.
This is just so fucking stupid.
The Fed is all about adding mass to problems rather than reducing mass.
Fuck them....define bubble...they cant even get the BLS to get an semi accurate jobs report with the birth death model
Jesus Christ this is truely amazing
I'm see a hooker bubble building. Pretty little real estate agents need to pay for gas.
"El Cliffo writes:
" . . .the housing bubble of this decade was the type of bubble that should have been targeted with closer supervision and tighter regulation"
Weren't higher interest rates the only supervision or regulation they needed?"
All the Fed could do on the interest rate is raise the front of the yield curve. With the flood of money coming in from Asia, all that would have just meant the yield curve was flatter and you would have had lower long term rates. The bubble would have been fueled with fixed rate mortgages instead of floaters. Remember the "conundrum"?
That's why they argue that they needed better supervision. The bubble was inevitable given the pattern of international financial flows, all they could do was to try to keep some people out of harm's way.
If the bubble were to be stopped, trade policy would have had to be tightened, to prevent the inflow of cash.
So by regulation, what does he mean:
(1) margin limits
(2) reserve requirements for shadow banking entities
(3) regulations on mortgages themselves?
Fire this spineless fed monkey!
My 10 year old has more common sense and better judgement than these clowns.
Soaring inflation on the jmiddle class to bailout their incompetency.
Fire these unelected misfits.
Did hell freeze over?
"Emma Anne writes:
So by regulation, what does he mean:
(1) margin limits
(2) reserve requirements for shadow banking entities
(3) regulations on mortgages themselves?"
All of the above, although (1) would have been applicable to the stock market bubble in 2000. And the mortgage regulation would probably have involved scrutiny of the lending practices more than disallowing products outright.
Whether the Fed has a legal mandate to do all that is unknown; they certainly did not attempt to do test the limits of their powers under the Greenspan Fed.
That said, if they tried, the real estate industry would have burning the Fed Governor in effigy.
My mantra:
The trade deficit sent dollars abroad and mortgage securitization gave the opportunity to foreign holders to invest in housing, which always goes up, rather than stogey TBills at 3-4%
Oh.
And the beat goes on.
Is this bullish or is this bearish for stocks?
From a technical perspective, indexes look like they are making a top so I would guess it's bearish. But if it's not, then it's very bullish.
What bond guy said - both coments - exactly.
BTW - trade policy wouldn't necessarily have to have been changed - but the flood of easy money coming in to replace the 'trade CAD' going out would have found a different home had mortgage origination regs remained as tight as past generations - that money would have flowed into stocks, treasuries and tightly regulated agency - but not necessarily the current highly unregulated subprime.
The result would have been similar though - a bubble somewhere until the Asian merchantilists threw in the towel & let their currency float and correct the CAD imbalances via dollar depreciation (inevitable).
I'd LOVE to hear the Fed Gov's address that one... not much they could've done but it sure would have been fun watching them admit impotency.
I say we have the shaman toss the chicken bones and see what they say.
What bubble. They never even aknowledged it existed. It was froth. Complete bullshit. No one believes these chumps.
why don't they use pointed sticks?
All assets have long term trend lines. When prices rise above the trend the solution is simple, slowly increase margin requirements to reduce borrowing that fuels further price increases. In the case of housing, simply increase the down payment required... if we are at an already low 5%, go up 1%/month until we get to at least 20%. It is logical to reverse course when prices go under the trend.
Such a policy does not either boost or cut prices on its own, just avoids excesses.
The Fed should please commit ritual suicide. That is what the Fed should do. Seppuku.
Of course, why anyone is really shocked by all this is beyond me. The housing and credit bubble, including the greatest transfer of wealth from the lower to upper classes in world history, was brought to you by the same folks who:
Invaded and occupied Iraq on the basis of lies, killing millions and spending trillions to make Dick Cheney and Carlyle Group mega rich.
Supported the "two great democracies of the Middle East", Israel and Pakistan. Mmm, terror, holocaust, concentration camps, human trafficking, war. And then there's Pakistan.
Shredded the Constitution. Just a "piece of paper". Wire tapping, waterboarding, kidnapping, torture, illegal imprisonment.
Lied, stole, obfuscated, and pardonned themselves when caught.
Spent trillions on the War on Drugs, putting millions of Americans in prison and bribing hundreds of officials. Result? Lowest street prices for drugs in a decade. Just Say No to the War on Drugs!
Is America better than most countries? Yes, of course. but that argument is specious and beside the point. America is not a democracy, it's a hypocracy.
How nauseatingly STUPID for Mishkin to come out NOW with these suggestions on how to prevent an RE Bubble.
Talk about closing the barn door.
The Federal Reserve is worse than useless. It is the destroyer of our economy. Period.
Ministry of Truth-
Add this to your list of "What we 'got' from the Housing Bubble" :
-Massively, obscenely overpriced homes that NOBODY, including the "rich"!, can afford.
-Societal disruption from wrecked neighborhoods, foreclosures, because NOBODY CAN AFFORD these homes.
-A complete and utter trouncing of ethics and morality when everybody jumps on the "it's not a home- it's an ASSET!!!!!" bandwagon.
Oh yeah and now let's add food and fuel inflation to the mix while these a$$holes at the helm trash the dollar in their effort to KEEP homes UNaffordable.
They've really gone way too far this time.
w-
LOL. You're right. Screwing people out of a decent place to live at a price they can afford is one thing... ....But the Fed would never actually sit by and "monitor the situation carefully" as people starve or riot over food.
Local grocery store shelves empty out in half a day now whenever a specific item goes on sale. At least they're still issuing "rain checks". Wonder how long that will last.
Oh, I thought it was just wide spread wealth creation via no form of productive action on the part of the individual. Just pretending that everybody is richer doesn't produce more oil or food? Next you are probably going to tell me that my lunch isn't even free.
There seems to be a theoretical/ideological factor at work. I had a go-'round with David Altig (Chicago school, now back at the Fed (Richmond)) on his (now long dormant) macroblog macroblog about a year ago on this topic.
He was adamant that it just wouldn't be right for economists to interfere in the market's determination of asset prices.
Greenspan had the same ideology -- that economists couldn't possibly know the proper prices of assets better than markets.
Expat wrote: The housing and credit bubble, including the greatest transfer of wealth from the lower to upper classes in world history, ...
But the largest fraction of the wealth transfer was not to the upper classes, but to the construction workers, building material suppliers, and the people cashing out through the housing ATM.
The horror is that to rip off a few hundred billion in bonuses, the Wall St. crowd lent literally trillions of dollars that went into building housing of types and quantities we didn't need, and into luxury consumption by the housing ATM folk.
In the suburbs of Chicago, the bubble resulted in the destruction of much good, affordable housing in order to get lots on which to build million-dollar McMansions. The teardowns weren't decrepit or derelict -- they were well-built, 3-bedroom, 2-bath suburban homes in good condition, around 1800 sqft. Their replacements? 5000 sqft monstrosities.
Closing the barn door is all nice and fine, but Flossie has been wandering around the house and how are we going to get the cow poo out of the carpet?
While we shriek at Mishkin, it might also be worth noting the extraordinary change this represents. Under Greenspan (and most recent Treasury Secretaries, Republican and Democrat), the idea that greater financial regulation might be a good idea was not looked upon favorably. Without that tool, all that was available was rates. Setting rates to deal with a bubble has the same drawbacks as setting rates to deal with a single commodity price - it puts the hurt on everything else to deal with that single problem. A refusal to consider regulatory measures meant dealing with a bubble was a practical impossibility.
bond guy and dryfly seem to argue that it is a political impossibility, so that the shift in regulatory thinking is going to prove inoperative. Could be. But at least the Fed guys are continuing to rethink the world. There has been a lot of that under Bernanke. While that is going on, we might want to stop tarring this Fed with the same brush as the last. The "great man" model of central banking is evaporating as we see the impact of Greenspan's efforts. We may find we like the technocratic model better. May as well give it time, because the Fed is the only central bank we've got.
Too little, too late.
And it doesn't matter. I am sure that if they can succeed in ramping up the Housing Bubble again, it will somehow become "a vital part of repairing our economy." And they have yet to do anything about the collapsing dollar that has helped create the commodities Bubble. But starving people are fine to the Fed and their masters, so long as it is the "little people" starving.
How to respond to a bubble?
Low, stable inflation and sensible, consistent regulation.
Oddly enough, exactly the same things the Fed should be going for when there is not a bubble.
The point isn't that the Fed should do nothing when there is a bubble, it's that they shouldn't try and use a good economy as an excuse to avoid their responsibility.
If you're not artificially propping up the money supply and you're taking the whole 'safety and soundness' thing seriously to begin with, then "Let the market work it out" is a perfectly sensible response to whatever bubbles occur.
If.
If you woke up in a dream and found yourself on a vast plain with a herd of zebra present, where might one be?
If you woke up in a dream and interest rates had declined to the lowest level in well over 50 years, where might one be?
I propose that a new arm of the government be set up.
THE BUBBLE WATCHERS
The true bubble was in money.
The only regulation the fed needed was of its own dollar printing presses.
It still doesn't get it. Now the bubble is in foreign currency, oil and food.
If "A" (too much money) causes "B" (asset inflations) then the way to get less "B" is to cut back on "A". Instead the fed, ever mindful of the short term, just keeps those "A" presses running.
I'm see a hooker bubble building. Pretty little real estate agents need to pay for gas.
I think your analysis is upside down. It'll be a hooker glut.
Boob jobs, however, will be in demand ... which will inevitably lead to a bubble bubble.