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Posts Tagged ‘Ben Bernanke’

Once Measured, Greenspan Says Goodbye With Number 14: Bernanke Starts Today

February 1, 2006 | 12:02 am | |

Source: WSJ

The housing market has greatly benefited from the Greenspan era, especially over the past decade. The Federal Open Market Committee strategy began to finally crimp growth in the housing market this past summer after 12 months of rate increases. The recent change in the housing market was effected by rising short term rates designed to reign in the inflation threat, before which low rates previously had provided an historic level of affordability to purchasers and triggered one of the most significant housing booms of all time.

Over the last several months, long term rates have remained largely stagnant, even falling, but short term rates have continued to rise.

Of great concern to the housing sector is the actions of the incoming Fed Chair Bernanke since Greenspan seemed in favor of asset appreciation, both in stocks and housing, while at the same time, was inflation-averse.

Mortgage rates have driven this housing boom and will determine the eventual outcome.

The FOMC raised the federal funds rate for the 14th time in a row by 25 basis points to 4.5%. Most economists think there is at least one more increase left before FOMC takes a breather. However, Bernanke, may have some wiggle room and forgo or skip a rate increase at the next meeting.

The removal of the word “measured” has been seen as a sign that the Fed is nearing the end of this 18 month strategy. The WSJ does an amazing job dissecting the FOMC letters after each meeting [WSJ]

One thing I will miss about Greenspan is the intense analysis of his vocabulary. Just think about what the WSJ has done here. It has dissected a one page letter to generate clues about future rate moves. This is insane, but necessary.

Bernanke is in favor of more openness with the target rate goals of the Fed. This will likely only work if he does not burn up the credibility that Greenspan has amassed over the past 18 years. How his moves impact the housing market and its importance to the economy, will largely determine his success.

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The Porridge Is Cooling: Making The Case For Goldilocks

January 17, 2006 | 12:05 am | |

Those who have been bullish on the economy seem to be making the case that it is entering Goldilock’s territory, not too hot, not too cold []. The U.S. economy grew at the slowest pace in nearly three years [Market Watch] in the just-concluded fourth quarter, economists estimate.

“Led by what could be the weakest consumer spending since 1991, the economy likely grew at about a 2.7% annual pace in the fourth quarter after 11 straight quarters of growth above 3%, economists say.”

“The slowdown is just what the Federal Reserve wants at this point in the business cycle. The Fed has boosted its short-term interest rate target 13 times since mid-2004 in a bid to put the brakes on the economy.”

“The Fed is expected to raise rates again on Jan. 31 and likely in March.”

“Housing was one of the few bright spots in the fourth quarter’s growth mix, along with inventory rebuilding.”

A couple of thoughts here… most think that the Fed will increase short term rates two more times and then wait and see what happens. We will also have to wait to see what Bernanke has in store for us (hopefully in the new bernankespeak) IMHO, the Fed usually goes 2 increases too far as it relates to housing.

It is a remote possibility that the Fed may actually lower short-term rates in 2007 if the economy begins to slide, thereby aiding the housing market if mortgage rates follow suit. However, the economy walks a fine line since tepid economic growth will keep a damper on mortgage rates but strong growth will create more jobs and demand, providing upward pressure on mortgage rates.

There has been a lot of concern that the handoff from a weaker housing market, which stimulates consumer spending, to an improved corporate profit picture will not result in a full economic offset. The slowing economic growth engine beginning to emerge seems to be proving this point.

Right now, the economy may be entering Goldilocks mode and that may prove to be a good thing for housing in 2006.


When Economic Metaphors Are More Exciting Than Reality

December 27, 2005 | 12:01 am | |

In the Lewis and Parrish article Economic Addiction [Barron’s] their premise is that “for decades, desparate people have turned to 12-step programs to overcome their addictions to alcohol, drugs, overeating or even sex.”

The question facing incoming Federal Reserve Chairman Benjamin Bernanke is how many steps will it take to recover from an addiction to easy money?

“Like many addictions, America’s current problem came from the overuse of a good thing, in this case monetary stimulus. Like many addictions, its consequences pervade all aspects of daily living, as prolonged low interest rates are reflected in rising inflation, the frothy — if not bubbly — housing sector and the low savings rate. And like many addictions, the self-destructive behavior has been facilitated by enablers, in this case the traders and investors in the bond market.”

They contend that the bond market is tempting the Fed to ignore warning signs of inflation. The Fed has limited options if inflation does appear because of such low rates. They content that Bernanke, because of his “inflation targeting” will be more focused on inflation than Greenspan.

The authors suggest that energy prices will affect core inflation [MarketWatch] and housing too.

Higher housing inflation is a certainty: Owners’ occupied-housing costs, nearly 30% of the core consumer-price-index basket, are calculated using rents, which are moving up as higher rates dampen the ownership boom.

Thats an interesting take and a bit gloomier than I would have thought. While rents are likely to move up as mortgage rates rise, mortgage rates have been largely docile for the past two months. The authors seem to assume that housing prices must fall if they are not rising, with no option for more modest increases or even a sideways move. The dramatic metaphors make for an interesting read as well (just mention sex in the same sentence as economics and I pay attention).

This all or nor nothing stance has been one of the characteristics of the housing commentary and media coverage which has been more pronounced than in the last cycle.

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Chinese GDP: Apparently Its A Game

December 20, 2005 | 12:01 am |

I have been meaning to post this since last week but I’ve been trying to squeeze in my holiday shopping…

Daniel Gross, in his excellent MoneyBlog observes that the Chinese economy grew 15% overnight

This is particularly disturbing since we are looking long and hard at Chinese GDP and wondering what affect the Chinese economy is going to have on mortgage rates in the US next year.

In Richard McGregor’s article China to up GDP estimate by 20% [FT]:

“The revision is set to restate the size of its economy, in effect adding on the equivalent of Turkey and gaining the rank of the world’s fourth-largest economy.”

And here’s an amazing statement:

Zhou Xiaochuan, governor of the central bank, said this week: “The figures we used in the past have all been changed.”

Can you imagine if Greenspan or Bernanke had done this? Bedlam would ensue in the financial markets.

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Greenspanspeak Nears Peak: Fed Moves Toward Neutral On Rates

December 14, 2005 | 12:01 am | |
Source: WSJ

The Fed increased the Federal Funds rate to 4.25% [WSJ], the 13th increased since June 2004. However, for the first time since 2002, it omitted the word “accommodative” which means that rates are nearing the point where they neither stimulate or deter economic growth. The less restrictive wording will give Bernanke. Greenspan’s replacement, a little more flexibility.

For housing: If inflation is in check, then mortgage rates may be less likely to move a whole lot higher making the transition to a less frenzied housing market more attainable.

However, its not clear whether inflation really is in check. Barry Ritholtz of the Maxim Group and webmaster of Big Picture clearly disagrees with this assessment:

“Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained.” Quite frankly, we do not believe them. We know that beyond the rises in food and energy prices, nearly everything — from healthcare to building materials to education costs to insurance to commodities — costs more. And gold, the world’s best inflation indicator, is well over $500 per ounce. Where ever we look, we see evidence that prices have limited stability and an upward bias.”

Barry adds in a comment:

Microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally.” – P.J. O’Rourke

The WSJ summarizes:

“Overall inflation recently topped 4%, at an annual rate, because of soaring energy prices. Excluding food and energy, it is only about 2%, but Fed officials worry that higher energy prices will eventually lead to higher wage demands and prices for other goods and services. Although gasoline prices have fallen back from their levels reached just after Hurricane Katrina struck the Gulf Coast, natural-gas prices have climbed, hitting a record yesterday as cold weather blanketed the Northeast.”

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Its The Great Pumpkin Ben Bernanke, And The Yield Curve Is Nearly Flat

October 30, 2005 | 9:40 pm |

In Bill Gross’ PIMCO Monthy Blog “Investment Outlook” PIMCO he comments that:

…because the U.S. economy has evolved into a highly levered finance-based economy, it stands to our reason that this modern day version is more sensitive to changes in interest rates than those of years past.

As an economy, we are more sensitive to changes in interest rates then in prior rate tightening cycles. “By the time 10-year and 2-year Treasuries reach parity, as is almost the case now, the economy is typically slowing and the Fed is at or near the end of its tightening cycle.”

In other words, the Fed’s strategy of raising short terms rates to reign in the economy to stem inflation may be coming to an end. If you agree with Bill Gross’ assessment, then upon further reflection its not clear whether this is a good thing for the housing market. It suggests a weaker economy which may help temper mortgage rate increases, which housing may be especially vulnerable to, but it also may mean that a weaker economy will not be able to keep pace with rising housing prices because of weaker employment and other factors. The result? A more tepid housing market characterized by flat or modest appreciation and a coooling off of the rate of new development.

Webmaster’s Confession:
I had to get a Halloween reference into this post. 😉


Fed Chair Nominee Says There’s No Housing Bubble to Go Bust

October 30, 2005 | 7:04 pm |

The Fed Chair nominee doesn’t think there is a looming bust in the housing bubble [Washington Post]

“U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.”

This is likely to be one of the key topics of the senate hearings for his nomination.

He has maintained the the “cooling” of the housing market won’t hurt the economy. This is an interesting position since housing has been so closely tied to current consumer activity, which accounts for 2/3 of the economy.

If housing markets fall, Bernanke appears to be unwilling to use short term rates as a tool to prop them back up. The overall economy takes precedence over individual homeowners. Of course, with Greenspan, there has recently been a disconnect between mortgage rates and short term rates so it is not clear whether this subtle change in policy will result in any difference in the housing market.

Other Links

Bernanke sees no housing bubble in U.S. [UPI]
Ben Bernanke has a tough act to follow as Fed chairman [Newsweek]
So long Alan and ‘measured?'[CNN]
What if the Fed Chief Speaks Plainly? [NYT]

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Nobel Prize In Economics: Housing Without A Helmet And An Invisible Hand, eh?

October 27, 2005 | 9:10 am | |

Thomas Schelling, professor emeritus at the University of Maryland won a Nobel prize in economics whose work on the relationship between competition and and social welfare was highly regarded [NYT]. He contended that we can learn more about what people value by looking at the rules that result rather than the choices made by each individual. This is contrary to Adam Smith’s theory of the invisible hand that says that self interest promotes the greatest good of all.

Using a hockey example, a player may increase their odds of winning by playing without a helmet because of better visibility but increases their odds of injury. However, if everyone follows suit, then all players increase their odds of injury and the advantage of winning evaporates. This is why helmet rules come into play. Similar comparisons can be made to restrictions on Nascar race cars, labor wage gains, working longer hours for a promotion, etc.

“As in hockey, many of the most important outcomes in life depend on relative position. Because a “good” school is an inescapably relative concept, each family’s quest to provide a better education for its children has much in common with the athlete’s quest for advantage. Families try to buy houses in the best school districts they can afford, yet when all families spend more, the result is merely to bid up the prices of those houses. Half of all children will still attend bottom-half schools.”

In other words, if everyone takes the same action, the bar is simply raised higher making it more difficult for everyone or negating the perceived advantage of the original action.

Webmaster’s Note: The author of this NY Times article is Robert H. Frank , an economics professor at Cornell University and co-author of “Principles of Microeconomics” with Ben S. Bernanke, recently nominated to replace Alan Geenspan as Chairman of the Federal Reserve. This is one of the best articles on economics I have read in a long time.


Hawaiian Shirts and Bermuda Shorts: Bush Names Bernanke To Replace Greenspan

October 25, 2005 | 7:56 am | |

As the Greenspan era comes to a close, I am going to miss the new phrases that would enter our vocabulary from time to time such as “frothy”, “irrational exuberance”, “conundrum”, “speculative excesses, “Greenspan-speak” and others. Most of all I am going to miss the confidence the markets placed in his policies. Replacing him is a tough act to follow although the financial markets appear relatively happy [Marketwatch] with the choice as the Dow and S&P had their biggest increase in 6 months after the announcement [Marketwatch].

Yesterday President Bush nominated Ben S. Bernanke, a former Federal Reserve Board member and Princeton professor who currently chair’s the President’s Council of Economic Advisors to be the next Chairman of the Federal reserve [NYT]. He is considered a “first, among equals” to his peers but his political views are largely unknown [NYT]. He actually penned a story in 2000 on the topic of replacing Greenspan [WSJ].

On a lighter note, there is some hope to fill the vocabulary void that I so enjoyed with Greenspan. He appears to have a sense of humor.

My proposal is that Fed governors should signal their commitment to public service by wearing Hawaiian shirts and Bermuda shorts has so far gone unheeded.

“Until he joined the Council of Economic Advisers, Mr. Bernanke had little contact with Mr. Bush [WSJ], and indeed in many ways is the antithesis of the power-suited business executives that Mr. Bush has preferred for top economic policy posts. But he appears to have earned Mr. Bush’s trust. Earlier this year, Mr. Bush gently chided Mr. Bernanke for showing up at an Oval Office meeting wearing a dark suit with tan socks, according to several people familiar with the incident.

A few days later, Mr. Bernanke showed up early for another meeting with Mr. Bush and distributed tan socks to the meeting’s other participants. When Mr. Bush arrived, all, including Vice President Dick Cheney, were wearing tan socks. Mr. Bush laughed.”

One of the more notable differences between Greenspan and Bernanke is how they handle inflation. Bernanke subscribes to the theory of setting a formal “Inflation Target” [WSJ]. which would demonstrate the Fed’s commitment to low inflation. Opponents of the strategy say that it will limit the central bank’s flexibility.

The WSJ has a series of charts that show the economic success of the Greenspan era.





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