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Both of next week’s key events are on Monday. Read more
Don Kohn, former vice chairman of the Federal Reserve, has just apologised for his errors in the financial crisis in front of the UK Treasury Select Committee, the equivalent of a Congressional committee.
He said he had “learnt quite a few lessons – unfortunately” from the financial crisis, including that people in markets can get excessively relaxed about risk, that risks are not distributed evenly throughout the financial system, that incentives matter even more than he thought and transparency is more important than he thought. Similar to Alan Greenspan’s mea culpa of 2008:
“I made a mistake in presuming that the self interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders”.
Mr Kohn told MPs Read more
Fans of Donald Kohn, second in command at the Federal Reserve, have a temporary reprieve today. Mr Kohn, who was slated to leave the Fed in a couple weeks, will now stay on perhaps until September.
Here’s the Fed’s statement:
Vice Chairman Donald L. Kohn announced on Friday that, at the request of Federal Reserve Chairman Ben S. Bernanke, he plans to remain on the Board until a new Governor is appointed but to leave no later than September 1. He had announced in March that he intended to resign at the expiration of his term as Vice Chairman on June 23, 2010. While he remains on the Board as a Governor, he will continue to participate in all Board and Federal Open Market Committee meetings.
Janet Yellen, now San Francisco Fed president, was nominated by President Barack Obama back in April to fill the soon-to-be vacant slot, but so far, there have been few visible moves to get the Senate confirmation process in motion – and Republicans have been actively obstructionist in confirming Obama picks to any government post. Read more
Can bubbles be predicted?
Donald Kohn, the outgoing Fed vice chairman, told an ECB meeting today, “Judging when an asset is getting away from its fundamental value is almost impossible.” (via Reuters).
It’s a step away from William Dudley, New York Fed president, calling for the Fed to take a more proactive approach in addressing asset bubbles. But if, as Mr Kohn says, you can’t identify them, you certainly can’t act against them. (Mr Kohn also warned, according to Reuters, that trying to do so would lead to “more volatility in output and inflation,” though it’s hard to imagine more volatility in output than we saw at the end of the last bubble.)
So how hard are housing price bubbles to identify? Looking at US housing prices over the past few decades, it’s not immediately obvious why a bubble would be difficult to identify. Housing prices may stray from rental prices, but in the long run, they return to the rental levels. (And why wouldn’t they? If houses were actually becoming more valuable in a given city, both housing and rental prices would rise).
Here’s nationwide home prices (Case Shiller 10-city) compared to rents since 1987:
Prices didn’t move far from the rental levels before returning until the recent run up. And then they skyrocketed. And then (un)predictably, they collapsed. Perhaps there’s no city that has a more perfect model of stable housing prices until the recent bubble than Miami. Was it that surprising that prices fell after that run up in housing prices (without a simultaneous increase in rents?) Read more
After noise earlier in the week, Reuters is reporting that the Senate’s vote to confirm Ben Bernanke to a second term as Fed chair won’t happen on Friday. That leaves one more week until his term expires. It’s not clear what will happen if the vote doesn’t take place before then, but one likely outcome is that Don Kohn will take over as interim chairman, a move unlikely to appease Mr Bernanke’s critics.
Bloomberg has an interesting article about the Senate looking to hold a confirmation vote on Ben Bernanke before his term ends at the end of the month. The piece notes that a delay in the vote would probably result in Donald Kohn, the Fed’s Vice Chairman, serving as acting chair until the Senate confirms Bernanke (who would continue serving as a governor).
Mr Kohn’s temporary succession would hardly be a coup for Mr Bernanke’s Senate critics. The vice chairman, closely aligned with Alan Greenspan, showed no greater concern for the risk of a recession than did Mr Bernanke (he saw inflation as a greater worry in October 2006), nor was he faster to recognise the extent to which homes were overpriced (saying the evidence suggested that overbuilding in 2004 and 2005 would be worked off without a significant decline from 2006 building levels). Read more
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