Gotta hand it to the Financial Crisis Inquiry Commission – They’ve got their work cut out for them tomorrow, if they want to get any new information at of former Federal Reserve Chairman Alan Greenspan.
Mr Greenspan has written his memoirs, published a 66-page paper on the crisis, and been interviewed by Congress and the media ad naseum.
So what questions could the FCIC possibly ask that would shed more light on Mr Greenspan and his views? We’ve asked the Fed watchers. Here are their responses. Read more
Fed leaders – past and present – have chosen today to be awfully talkative. And they haven’t at all times been in agreement with each other, either. So here are the highlights of today’s Fed speak.
Alan Greenspan, Former Fed chief, on the Bubble
Alan Greenspan, in an interview with Bloomberg TV, disagreed with SF Fed president Janet Yellen’s assessment that an increase in interest rates could have mitigated the growth of the housing bubble. He argued, as he has before, that a decrease in long term interest rates around the world led to the boom. Short-term interest rates were irrelevant.
Ok – so long-term interest rates are responsible for the bubble. We sure don’t want to encourage a housing bubble based on that again. Right?
Maybe not. Read more
President Barack Obama is reported to be looking at San Francisco Fed president Janet Yellen to fill Donald Kohn’s vice chairman seat when he leaves this summer. So what had Ms Yellen been looking at to boost the US economy?
Housing, she said in a speech today.
Ms Yellen, San Francisco Fed president, said last year she “became hopeful that the sector would provide a significant boost to the economy this year.”
But then, she said, the market seemed to have stalled. Indeed, home sales data released earlier today and the impending end of the home buyer tax credit bode poorly for a home price bottom.
Optimism on housing is nothing new for Ms Yellen (or, as we know, other FOMC members). Read more
What’s in a dissent? Quite a lot, potentially. Thomas Hoenig, the notoriously hawkish president of the Kansas City Federal Reserve Bank, had already disagreed at the last FOMC meeting on the reference to an “extended period” of low interest rates – saying the economy was strong enough that higher rates could be contemplated at some point sooner. Mr Hoenig disagreed again with his colleagues today, but elaborated on his reasons for doing so. It was not for fear that low rates could lead to a spike in inflation, as one might think, but rather because of concerns over a potential new asset price bubbles. “It could lead to the buildup of financial imbalances and increase the risks to longer run macroeconomic and financial stability,” the Fed said in the last line of its statement, explaining Mr Hoenig’s position.
This could open up a whole can of worms. Although certain asset price bubbles can be inflationary for the economy as a whole, there may be a debate about whether considering financial stability on its own when crafting monetary policy is consistent with the Fed’s dual mandate under law, which is to maximize employment while maintaining stable prices. Purists might argue it is not, others might argue that it is.
Mark Carney, Governor of the Bank of Canada, today spoke on Canada’s response to the financial crisis. In a question and answer period after the speech, Mr Carney said (via Reuters):
Our view is that the first line of defense of financial stability is regulation and we would underscore the experience with Canada, Australia, other major inflation targeters has been that you can have your cake and eat it too — you can have price stability, you can have financial stability if you get the regulatory side right.
As the governor of the central bank in the only country in the G7 that avoided bailing out its banks, Mr Carney has good reason to tout his country’s success. But what if the crisis has yet to pass? Read more
The IMF said that it did not take proper account of asset price booms when assessing Ireland’s fiscal situation in a paper today.
The paper said that the IMF’s calculation of the structural fiscal balance of Ireland was broadly based on the OECD approach. “While this approach works well in many cases, recent events have highlighted its limitations under certain circumstances, such as property or other asset price booms.” Read more
Who’s afraid of global growth?
Jürgen Stark, member of the executive board of the ECB, for one. At least, if it’s the wrong kind of growth.
One striking feature of the high global growth rates was the reliance on large and unsustainable global imbalances. In principle, current account imbalances can be desirable, if they channel funds across the world to their most productive use. But in the years prior to the crisis imbalances were a symptom of economic distortions: in some countries asset price bubbles developed and household debt levels rose beyond sustainable levels. Eventually, the rise in the household debt burden resulted in an acceleration of defaults on mortgage and consumer loans, which undermined the stability of the financial system.
In other countries – for example, in emerging Asia – which held the value of their currencies at artificially low levels to support their export-oriented growth strategies, the vast accumulation of foreign exchange reserves had potentially high opportunity costs. These managed exchange rate regimes may also have contributed to hampering necessary domestic adjustments and distorting the allocation of resources towards export-oriented industries.
His solution (in part): Read more
One way to assess if housing prices are rising for real reasons (ie, the property is becoming more valuable) or if they’re part of a bubble (ie, it’s a speculative boom, bound to crash) is to compare housing prices in a given area with rental prices. If housing prices are rising much faster over a prolonged period of time than rents, you’ve probably got a bubble on your hands.
Which begs the question: how do you measure rents? Read more
Eric S. Rosengren, president of the Federal Reserve Bank of Boston, today gave a speech on asset bubbles and systemic risk. It’s more or less in line with Bernanke’s line: monetary policy wasn’t the main culprit in inflating the housing bubble and so the problem requires a regulatory fix.
Mr Rosengren calls for forward-looking, systemic risk supervision, which he says is a “serious gap” in financial regulation.
The systemic supervision that is needed would focus on possible future losses and is inherently forward-looking. Doing this well requires an understanding not only of institutions but also markets, and it requires taking into account the full range of outcomes, both expected and potential – including those that have a low likelihood of occurring but that could have serious adverse consequences. While we may not be able to eliminate all bubbles, we should be able to limit the degree to which the financial sector feeds and propagates these booms, and the sector’s vulnerability to subsequent busts.
Mr Rosengren doesn’t spell out exactly what tools the regulators would have at their disposal if they identified a risk of an asset bubble. But, where a bubble exists, Read more
Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, today argued that the primary reason for financial market instability was a poorly defined government safety net for financial institutions. The bursting housing bubble, he said, caused pain for financial groups, but there was nothing fundamentally destabilising about it: institutions overvalued certain assets, and as the market corrected itself, people lost money.
The considerable downturn in housing market fundamentals alone would have led one to expect substantial movements in financial prices and quantities, with attendant strains for many institutions, even in a very well-functioning financial system.
Interconnectedness isn’t inherently destabilising, he argues. Financial institutions have every reason to “neglect the implied exposure to their counterparties’ counterparties.”
But, he says, the moral hazard created by the government’s implied guarantees to large interconnected institutions is destabilising. Read more
But it’s tightening standards anyway.
According to new rules released today, borrowers must meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. Canadians also won’t be able to take out home equity loans for the last 10 per cent of their home’s value. And those who buy investment properties will need to put down 20 per cent in order to receive government-backed mortgage insurance.
Still, Jim Flaherty, Minister of Finance, assures Canadians that there’s no housing market bubble, even as prices break new records in some cities. Read more
Ben Bernanke, Federal Reserve chairman, didn’t testify before the House Financial Services committee today on the central bank’s exit strategy. The committee meeting, like virtually everything else in the US capitol, was thwarted by the snow.
He did, however, release his prepared testimony, which received (as always) brilliant coverage in the FT, earlier on this blog, and in an editorial and other comment.
But I spent my day in a shutdown city. And in the spirit of passing time in a city where very little got done today, I’m choosing to write about what Mr Bernanke didn’t say, rather than what he did.
1. Mr Bernanke did not say how much will it cost the Fed to pay interest on banks’ holding of bank reserves. Read more
Well done to the Swedes. While the world frets and dithers about house price bubbles, the Swedish central bank has come up with a plan. In less than a year, a new commission will report back on all you could wish to know about Swedish housing bubbles: what makes them likely; what pops them; what tools are – or should be – available to combat them; and whether Swedes are currently in one.
The report will focus on residential property, although the (better studied) commercial property sector will be included. The commission will be run from within the central bank by heads of the monetary policy and financial stability departments. A related conference will be held in the autumn of this year and the final report is expected no later than January 31, 2011. Read more
Unless you’re in Ireland.
An economic letter put out by the Federal Reserve Bank of San Francisco today put the US housing run-up in perspective. In a cross-country comparison they found that home prices in the US rose less than those in a whole swath of European countries.
It’s worth noting that the graph seems to be consistent with data from the Federal Housing Finance Agency (formerly Ofheo), rather than the more commonly used Case-Shiller 20-city index, which would have shown US home prices more in line with Spanish ones. Each index has its advantages. The FHFA’s tracks the same home over time across the US, but only looks at homes worth below a certain amount, likely skewing the increases downward. The Case-Shiller index includes the higher value homes, but only includes 20 of the US’s cities, likely skewing upward). Read more
The Federal Reserve board members have argued that asset bubbles are hard to identify when they’re growing. In retrospect, though, St. Louis Fed president James Bullard is calling a bubble a bubble.
Asked by Fox Business News about the housing market recovery, Mr Bullard made clear he wasn’t holding his breath waiting for the market to pick back up.
We have too many houses, so I wouldn’t expect that to really boom on us.
Housing prices have “by and large” stabilised, he said. And even there, he hedged. Read more
The US government may be fueling another housing market bubble, according to a report released last week by the the Special Inspector General of the Troubled Asset Relief Programme (SigTarp).
To the extent that the crisis was fueled by a ‘bubble’ in the housing market, the Federal Government’s concerted efforts to support home prices…risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.
And yesterday, Paul Volcker, the former Fed chief who is now proposing a ban on proprietary trading at deposit-holding banks, reiterated the risks of too much government backing for the mortgage market, Read more
Ben Bernanke was sworn in today for his second term as Fed chief after last week’s controversial Senate vote. He ended up being confirmed with 70 votes, well over the number needed, but still far fewer than even unpopular central bankers are used to receiving.
So, are we looking at a new Fed chair, one humbled by his actions in the lead up to the financial crisis?
It’s hard to say. But he is willing to make at least one concession. Mr Bernanke called for the Fed to become more transparent.
The Federal Reserve is already one of the most transparent and accountable central banks in the world, providing voluminous information and explanation concerning all of its activities. However, I believe that we should be prepared to do even more, to become even more transparent. It is essential that the public have the information it needs to understand and be assured of the integrity of all our operations, including all aspects of our balance sheet and our financial controls.
Of course, he doesn’t want to go overboard. Read more
Largely in response to a Nouriel Roubini analysis published in the FT that argued that there was a bubble in emerging market stocks, the Richmond Fed put out a report highlighting fundamental factors that may have resulted in a sustainable rally.
The report isn’t arguing that a bubble doesn’t exist, mind you, just that it may not exist. And, they say, it may be that there’s no way to tell if it exists or not.
“The purpose of this Economic Brief is not to provide quantitative evidence disproving the existence of an asset bubble in certain markets, but rather to posit some factors that could contribute to a fundamentals-based explanation for the recent rally in certain risky asset markets.”
The bubble argument is essentially this: Read more
Interest rates are low. Consumer borrowing, however, is still expensive. So what are consumers doing?
Paying down their debt, says a report put out today by the St. Louis Fed. Households have reduced credit card debt by 3.5 per cent and mortgage debt by 2 per cent. The Economic synopses, written by William T. Gavin, St. Louis Fed Vice President, credits the spreads between interest paid on consumer savings (which is held down by low interest rates) and the cost of consumer borrowing (which remains relatively high.)
“Because interest rates on savings are so low, households have ‘saved’ by paying down credit card and mortgage debt.”
Of course, an alternative explanation is that the reduced mortgage debt (which has experienced its first year-on-year decline) is due to falling housing prices. Read more
The Senate banking committee briefly broke into rumblings about 20-somethings with clever ideas being able to subvert the intent of Congressional laws on complicated banking matters.
It’s no reason not to pass legislation to ban proprietary trading, Paul Volcker said. “Yes, banks have 26-year-olds with a whole lot of mathematical training and all the rest, but the supervisors need to hire some 28-year-olds.”
Paul Volcker, in both his written testimony and during the question and answer period, said: “Bankers know what proprietary trading is, don’t let them tell you otherwise.”
Mr Volcker was also questioned on whether the US could learn anything from Canada, which had been able to avoid the worst of the housing crisis, a topic explored by the FT last week. Read more