Minutes just out show that South Korea’s last rate rise decision was unanimous as central bankers worried about inflation gathering pace. The country is rumoured to be buying dollars to weaken the won, which reached a two-month high yesterday.
Upward pressure on the won came courtesy of “offshore players”, the WSJ reports. Could these be the same foreigners Chile has blamed for its appreciating peso? The country’s finance minister said openly yesterday that the Fed’s $600bn stimulus programme was strengthening the peso, as he welcomed central bank intervention to try to weaken it.
China has openly and repeatedly made the same accusation, warning of QE2-fuelled asset bubbles. Thailand is rumoured to be intervening to weaken the baht, and Venezuela and Viet Nam have both recently devalued their currencies. Read more
The bond markets might be overdoing it a bit at the moment, Guy Quaden has acknowledged. Asked whether bondholders were wrong to fear deflation, the ECB governing council member told Belgian business dailies L’Echo and De Tijd:
“You cannot rule out that the bond markets are overdoing it at the moment… But deflation is as unlikely as strong inflation. Central banks will do anything to avoid deflation. They do not tolerate high inflation.“
Asked why the ECB had decided to extend to Q4 its offer of unlimited short-term credit to banks, Mr Quaden said that the money market was often more nervous toward the end of the year, and that certain longer-term refinancing operations were due to expire in the period. He underlined, however, the temporary nature of the help: “The banking industry,” he said, “cannot depend forever on the exceptional credit of the ECB.”
On the subject of fiscal austerity, he said neither he nor Jean-Claude Trichet would argue for brutal and immediate austerity, except in Greece. Read more
Central banks are debating whether they should extend their remit to spot asset price bubbles – but research from the Bank for International Settlements has just found that the ageing population will depress, if not reverse, price rises in future.
“In English speaking countries it seems that baby boomer purchases drove up house prices in the past, while their sales will drive real house prices down in the future,” writes author Előd Takáts. The US has apparently enjoyed an 80 basis point per annum (bppa) boost to date, but is facing a negative impact of 80bppa in future. Read more
What’s causing the foreclosure crisis? Is it the correction in home prices across the US from bubble-induced highs or is it, as many claim, a result of lax lending standards and predatory subprime loans?
The distinction isn’t just splitting hairs. Governors of the Federal Reserve and other policy makers have put quite a bit of effort into blaming failures of mortgage regulation (rather than market failures) for the crisis. But are no-income McMansion moms really the ones feeding the foreclosures? Or are otherwise credit-worthy homebuyers defaulting as they realise they owe hundreds of thousands more than their home is worth? After all – I can afford to pay back a loan of $500, but if I’ve used it to buy a tulip bulb that’s now worth $1.50, I might just decide to cut my losses and give it to the bank to garden.
Crunching the numbers leads to some interesting, if inconclusive, results. Read more
In which US cities are home prices likely to fall?
One measure is to look at the amount home prices have fallen, relative to the increases in their rental prices. Moves in rental prices tend to represent fundamental changes in the value of a property (people are paying only what it’s worth to stay there) rather than bubble-induced speculation about the future value of the property. In markets where there are bubbles, eventually, home prices should fall back in line with rental prices. Read more
We already know the Riksbank is planning to raise its key rate from a record low of 0.25 per cent this summer or early autumn, because the Swedish central bank has a policy of forecasting its rate path. But that hasn’t stopped the guessing games in the market as analysts try to decipher whether the move will come at the next meeting on June 30 or at the one after in September.
Bank governor Stefan Ingves wouldn’t give any clues when he spoke to the Financial Times today but his warnings on rising household indebtedness will only fuel expectations of a July hike, following the meeting on June 30. Sweden would become only the second western European country to tighten monetary policy since the financial crisis, after neighbouring Norway.
Low rates have encouraged a surge in mortgage lending that has Read more
The Chicago Fed today put out a rather unusual paper discussing the art and science of risk management. It concludes that too much focus was put on the science of risk management, rather than the art.
More and more, the ‘art’ of using informed intuition to navigate complicated risk landscapes was giving way to the ‘science’ of statistical models.
The Federal Reserve today released the transcripts from its 2004 FOMC meetings. Here’s a prescient comment, if ever there was one, from Cathy Minehan, president of the Boston Fed:
I remain concerned that the current very accommodative stance of monetary policy and the assureances that markets seem to have that we are on hold has increased leverage across all markets. When rates return to a more neutral place, as they ultimately will, this could create a burst of financial instability.
Who’s afraid of depressing asset prices by raising overnight rates?
Alan Greenspan has repeatedly said that raising overnight rates wouldn’t have been effective in mitigating the housing bubble. But it turns out that at least one member of the FOMC worried in a 2003 meeting that that was exactly what would happen should the Fed raise rates too quickly. Read more
The Bank of Japan is not going to let the government foist an explicit inflation target on it without a fight. In a fascinating speech given in New York yesterday BoJ governor Masaaki Shirakawa argues that inflation targets are one reason that central banks allowed asset price bubbles to develop. For good measure he suggests that the world learned the wrong lessons from Japan’s deflation – and implies that US monetary policy in the 2000s was too loose as a result.
Mr Shirakawa’s argument:
Second, some political, economic and social dynamics influenced central bankers, and it became difficult for them to conduct monetary policy based on factors other than the inflation rate. This mechanism is quite subtle. The logic that price stability is a precondition for economic stability and that the independence of the central bank is necessary for price stability, became gradually but firmly established in the 1990s. At the same time, the granting of independence naturally called for the strengthening of accountability. An easily identifiable benchmark was desired. The framework which best fulfilled such needs was inflation targeting. However, under an inflation targeting regime, the debate tends to center on the relationship between the target inflation rate and the actual or expected inflation rate.
As a result, the cost of justifying adjustments in monetary policy becomes quite high in the eyes of central bankers, when such adjustments are aimed to deal with imbalances which appear in forms other than price indices. Economists focused their attention to the linkage between the output gap and the inflation rate, while awareness toward financial imbalances was limited.
Today Alan Greenspan is speaking before the financial crisis inquiry commission about the Federal Reserve’s actions during the housing and mortgage boom which preceded the bust. Mr Greenspan has already spoken widely about his view of the Fed’s role in the crisis before Congress, in media interviews, in a recent academic analysis, and in his memoirs. But now it’s the FCIC’s turn to have a crack at him. They’ve got their work cut out for them if they want to get any fresh information from the former Fed chairman.
Update: They do a pretty good job. Note especially that Mr Greenspan says that Congress’s push toward homeownership affected the Federal Reserve’s decisions.
This is the second set of hearings, called “Subprime lending and securitisation and government-sponsored enterprises”. The hearing will last three days and cover 17 witnesses. Mr Greenspan is the first.
The hearing’s over. But here is the FT’s live blog, written as it happened, on the new (and old) Mr Greenspan had to say about the Fed and the crisis. 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
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
As the Fed approaches the end of its purchases of mortgage backed securities, Fannie and Freddie, the mortgage giants now under government conservatorship, are again raising the eyebrows of some within the Fed and congress.
The latest comments, fast on the heels of those of Ben Bernanke last week, come from Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, and Republican representatives Darrell Issa and Jim Jordan.
From Mr Lacker:
I have said elsewhere that it would be a mistake to try to build this expansion on another housing boom and that over time we should wean our economy off dependence on housing subsidies. Too many houses were built over the last decade, and what we’ve been through the last three years should teach us that subsidising housing mortgage debt was a dangerous policy that was carried too far. But whatever society decides about the bias toward housing, real regulatory reform would be incomplete without addressing the fate of the government-sponsored housing finance enterprises.
Separately today, responding to Tim Geithner’s testimony before the House Budget Committee that the post-conservatorship plan for the troubled mortgage giants wouldn’t be released until next year, Mr Issa and Mr Jordan called for a hearing into the administration’s treatment of the GSEs. 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
That other real estate market came back into the spotlight today as Chris Dodd, chairman of the Senate Banking Committee sent letters to a number of regulators, including the Federal Reserve, asking them to report on their efforts to stabilise the commercial real estate market.
By any realistic estimate, CRE has yet to finish wreaking havoc on the economy. Nearly half of CRE loans are currently “underwater” and the largest loan losses haven’t yet occurred, according to the Congressional Oversight Panel. 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 Norwegian central bank is risking an asset bubble by keeping interest rates close to the US benchmark in order to contain krone gains and protect exporters.
So says Nouriel Roubini, NYU professor, and, more important these days, one of the few who correctly predicted the financial crisis. “Even in Norway there is no willingness to raise rates – despite inflation and robust growth – because of concerns about the currency. That means you are feeding real estate and other bubbles,” Mr Roubini told Bloomberg in Oslo today. Read more