Should Bernanke be reappointed? Here's one take on it. I sort of agree with the author's criticism, although I don't know enough about Fed politics to know what alternatives there are.
QuoteDon't give Ben another term
Even if you agree with Fed Chairman Ben Bernanke's policy choices so far, you can't argue that he was slow to notice, and respond to, the subprime crisis.
By Desmond Lachman, contributor
July 22, 2009: 10:54 AM ET
NEW YORK (Fortune) -- Speculation that Ben Bernanke might very well be appointed for a second-term as Federal Reserve Chairman when his term expires in January 2010 has to remind one of Washington's Alice in Wonderland-like quality.
For if Bernanke were indeed to be reappointed as Fed Chairman, it would mean that, in the depths of by far the worst U.S. economic recession in the post-war period, one would be reappointing to the job the very person whose fingerprints, along with Alan Greenspan's, are all over that recession.
Bernanke's tenure as Fed Chairman has coincided with the most tumultuous period for the U.S. economy since the Great Depression. If there is one thing that we might have learned from this experience, it is the very high price that the country is now paying for a Federal Reserve that between 2000 and 2006 was totally oblivious to the dangers of the largest housing and credit market bubbles in the postwar period.
By now, we also should have learned the high price of a Federal Reserve that was painfully slow in reacting to the bursting of those bubbles in 2007 and that lacked any real financial market strategy for picking up the pieces once the bubbles burst.
In deciding whether or not to renew Bernanke's term, President Obama would do well to ask himself whether, during a four-year tenure as Chairman, Bernanke has consistently shown himself to be early in detecting looming problems. He might also usefully ask whether Bernanke has been sufficiently forceful in staving off those problems as soon as they were identified.
A useful place for Obama to start would be to ask why Bernanke was silent in 2006 as the housing bubble was continuing to inflate and as the worst of the subprime mortgage loans were being made. During that year, a total of around $600 billion in subprime mortgage lending -- or around one half of all subprime lending ever -- was made on conditions that were materially more lax than earlier vintages of subprime lending.
It would also seem reasonable for Obama to hold Bernanke accountable for totally misjudging how serious the bursting of the housing market bubble would be for the overall economy. And for how large the losses would be to the financial system from imprudent subprime lending.
In April 2007, when he first identified that something was amiss with subprime lending, he assured Congress that the subprime problem would be limited and that any fallout would be confined to the housing sector. His highest estimate in 2007 was that such losses would cost the economy about $150 billion. The latest estimate of the eventual subprime-related losses to the U.S. banking system is more than $1.5 trillion.
Perhaps even more disturbing to Obama should be how blinded Bernanke was to the need for early and decisive monetary policy action to counter the fallout from the housing market bust. Indeed, it was as late as August 2007 before the Federal Reserve started its interest rate cutting cycle.
This was long after it had become apparent to most market observers that large subprime losses and a lack of transparency in the newfangled debt instruments were leading to a seizing up of the international banking system. And even when the Fed did begin cutting interest rates, it did so gingerly, and it repeatedly underestimated the downside risks to economic growth from the housing market debacle.
Advocates for Bernanke's reappointment stress his impressive academic credentials as an expert on the Great Depression and the 1990s Japanese financial crisis. These credentials, they argue, could not be more relevant at this difficult stage in the U.S. economic crisis.
They point to the consummate skill with which Bernanke prevented financial Armageddon in the wake of the Lehman bank failure in October 2008. And they also underscore the highly creative, albeit belated, way in which Bernanke has doubled the size of the Fed's balance sheet and resorted to so-called quantitative easing in recent months to reduce long-term interest rates and keep financial markets adequately liquid.
But in deciding on whether or not to renew Bernanke's term, Obama would do well to focus on the record of his full tenure in office rather than only on Bernanke's relative successes in the nine months after the Lehman bankruptcy.
If Obama were to do so in a dispassionate and deliberate manner, he would find that Bernanke's full-term performance has been checkered at best. There must be other candidates who could be expected to do a better job than Bernanke as Federal Reserve Chairman.
Desmond Lachman is a former IMF deputy director and currently a senior fellow at the American Enterprise Institute.
By this logic, we should be firing Geithner as well. I call BS. Bernanke is doing all right.
I do think it's nice to have someone with a little bit of foresight in position of running the economy. It wasn't rocket science to predict what could happen when the housing bubble burst, and yet that possibility didn't occur to most decision makers.
If it can be demonstrated that Bernanke lacks the quality of "foresight" and we can reasonably conclude that he will continue to operate with this handicap then he should be replaced. If it can be demonstrated that he is incapable of incorporating new information about the risks of credit bubbles and appropriate policies to defeat them he should be replaced.
I don't think we could have had a more qualified person in place during this financial crisis. Bernanke had studied and was well aware of the mistakes the Fed made during the Great Depression. He made damn sure this thing didn't turn into another Great Depression.
The American Enterprise Institute was one of the neoconservative pillars, that supported and gave advice to GW Bush government. It is clear that they want to blame others for the mistakes of that government.
If only Bush had cared...:weep:
Quote from: DGuller on July 22, 2009, 12:01:21 PM
I do think it's nice to have someone with a little bit of foresight in position of running the economy.
I agree but I don't know of any astrologers who also have a basic grounding in monetary operations.
Quote from: The Minsky Moment on July 22, 2009, 03:42:27 PM
Quote from: DGuller on July 22, 2009, 12:01:21 PM
I do think it's nice to have someone with a little bit of foresight in position of running the economy.
I agree but I don't know of any astrologers who also have a basic grounding in monetary operations.
Ask around. You are bound to find some.
EDIT: http://en.wikipedia.org/wiki/Financial_astrology It seems to exist. Makes sense. If Reagan could add traditional african practices to economics then why not Chaladean?
This is my view on Bernanke:
http://www.youtube.com/watch?v=3u2qRXb4xCU (http://www.youtube.com/watch?v=3u2qRXb4xCU)
Quote from: DGuller on July 22, 2009, 12:01:21 PM
I do think it's nice to have someone with a little bit of foresight in position of running the economy. It wasn't rocket science to predict what could happen when the housing bubble burst, and yet that possibility didn't occur to most decision makers.
The fact that most decision makers didn't predict this kind of argues that it was in fact difficult to predict...
Quote from: Barrister on July 22, 2009, 07:09:13 PM
Quote from: DGuller on July 22, 2009, 12:01:21 PM
I do think it's nice to have someone with a little bit of foresight in position of running the economy. It wasn't rocket science to predict what could happen when the housing bubble burst, and yet that possibility didn't occur to most decision makers.
The fact that most decision makers didn't predict this kind of argues that it was in fact difficult to predict...
Or we just had poor decision makers.
Quote from: Barrister on July 22, 2009, 07:09:13 PM
Quote from: DGuller on July 22, 2009, 12:01:21 PM
I do think it's nice to have someone with a little bit of foresight in position of running the economy. It wasn't rocket science to predict what could happen when the housing bubble burst, and yet that possibility didn't occur to most decision makers.
The fact that most decision makers didn't predict this kind of argues that it was in fact difficult to predict...
Not necessarily. I think it argues that there was groupthink among the decision makers.
Quote from: Barrister on July 22, 2009, 07:09:13 PM
Quote from: DGuller on July 22, 2009, 12:01:21 PM
I do think it's nice to have someone with a little bit of foresight in position of running the economy. It wasn't rocket science to predict what could happen when the housing bubble burst, and yet that possibility didn't occur to most decision makers.
The fact that most decision makers didn't predict this kind of argues that it was in fact difficult to predict...
DGuller predicted it though. I remember following him from thread to thread posting all the reasons he was wrong.
Who won the argument?
Quote from: Razgovory on July 22, 2009, 07:23:29 PM
Who won the argument?
Lets revisit the argument. DGuller maintained that stock valuations were too high, home prices were too high, and investment banking was out of control and due for a correction. I disagreed on all points. Who would you give the edge to?
Quote from: alfred russel on July 22, 2009, 07:35:27 PM
Lets revisit the argument. DGuller maintained that stock valuations were too high, home prices were too high, and investment banking was out of control and due for a correction. I disagreed on all points. Who would you give the edge to?
You thought home prices were *not* too high? :blink:
Quote from: Admiral Yi on July 22, 2009, 07:50:46 PM
Quote from: alfred russel on July 22, 2009, 07:35:27 PM
Lets revisit the argument. DGuller maintained that stock valuations were too high, home prices were too high, and investment banking was out of control and due for a correction. I disagreed on all points. Who would you give the edge to?
You thought home prices were *not* too high? :blink:
I didn't think there would be a meltdown.
Quote from: alfred russel on July 22, 2009, 07:56:10 PM
Quote from: Admiral Yi on July 22, 2009, 07:50:46 PM
Quote from: alfred russel on July 22, 2009, 07:35:27 PM
Lets revisit the argument. DGuller maintained that stock valuations were too high, home prices were too high, and investment banking was out of control and due for a correction. I disagreed on all points. Who would you give the edge to?
You thought home prices were *not* too high? :blink:
I didn't think there would be a meltdown.
I thought it would unwind slowly and not crash.
Quote from: Barrister on July 22, 2009, 07:09:13 PM
The fact that most decision makers didn't predict this kind of argues that it was in fact difficult to predict...
I think this is true, but I also think there was an element of groupthink as DGuller says. Ultimately decision makers have to be elected. How do you get elected telling people their houses are over-valued and that they need to spend and borrow less? I think Jimmy Carter tried it once.
Generally I usually agree with Dguller or JR on economic stuff cause I don't like to think on my own. So I'm like right by proxy!
Quote
There must be other candidates who could be expected to do a better job than Bernanke as Federal Reserve Chairman.
Most underwhelming way to end an article ever. 'There must be' is not exactly the same as 'There are'... and I must point that the piece very definitely fails to mention any name. If there are truely qualified candidates that saw what Bernanke -and so many others- didn't see, Lachman should have mentioned some of them. Without those names his article looks like a rant
And I have to add that there is a serious problem with people in high places telling the economic naked truth. Namely, self-fulfilling prophecies. If Bernanke had told the world that there were inmense credit and housing bubbles, that stock valuations were too high, home prices were too high, and investment banking was out of control and due for a correction (all of which was patently true as we see now) and started to take appropiate measures, he would have caused a panic and a crisis, very probably lesser but a crisis, and he would be blamed for it. "Damned if you do, damned if you don't".
Quote from: Admiral Yi on July 22, 2009, 07:50:46 PM
Quote from: alfred russel on July 22, 2009, 07:35:27 PM
Lets revisit the argument. DGuller maintained that stock valuations were too high, home prices were too high, and investment banking was out of control and due for a correction. I disagreed on all points. Who would you give the edge to?
You thought home prices were *not* too high? :blink:
To revisit this, I argued at times that housing was not a good investment, but with DGuller that it was about to melt down.
Here is a thought experiment, that to keep things simple is going to involve a lot of assumptions:
The expected nominal return on the stock market is 10% (after tax).
The expected risk premium between stocks and housing is equal.
Your property taxes and property insurance will be offset by the home interest deduction.
The long term expected return on a home is inflation, which is 3%.
Home repairs run at $2,000 a year.
Closing costs are negligible.
Your rent is $1,500 a month.
Your landlord offers to sell you the home at the current market value of $450k. You can get an interest only loan at a 6% interest rate with 10% down. You have the funds for the downpayment invested in stocks. You will not need the money anytime soon and are not planning to move. Is this a good deal?
Quote from: alfred russel on July 23, 2009, 12:26:53 PM
To revisit this, I argued at times that housing was not a good investment, but with DGuller that it was about to melt down.
Here is a thought experiment, that to keep things simple is going to involve a lot of assumptions:
The expected nominal return on the stock market is 10% (after tax).
The expected risk premium between stocks and housing is equal.
Your property taxes and property insurance will be offset by the home interest deduction.
The long term expected return on a home is inflation, which is 3%.
Home repairs run at $2,000 a year.
Closing costs are negligible.
Your rent is $1,500 a month.
Your landlord offers to sell you the home at the current market value of $450k. You can get an interest only loan at a 6% interest rate with 10% down. You have the funds for the downpayment invested in stocks. You will not need the money anytime soon and are not planning to move. Is this a good deal?
It's a marginally good deal with those assumptions, judging just from first year analysis. However, how good this deal is depends critically on the assumed house appreciation rate. A little movement here or there changes the math substantially.
Also I agree with Dguller cause he laughs at my jokes. :Embarrass:
Quote from: DGuller on July 23, 2009, 02:04:50 PM
It's a marginally good deal with those assumptions, judging just from first year analysis. However, how good this deal is depends critically on the assumed house appreciation rate. A little movement here or there changes the math substantially.
Which is 3% with inflation.
If you looked at a historical metric such as a comparison to rents, the price looks overvalued with the price 25x the rent. What is driving the relatively high valuation is the historically low interest rate and the high degree of leverage (just 10% down). There is no guarantee that both will continue to be available, but both show little evidence of going away soon.
Quote from: alfred russel on July 23, 2009, 03:22:07 PM
Which is 3% with inflation.
Yes, that's the assumption. However, the results change drastically based on the changes in that assumption. Assume 0% or 1% appreciation, and suddenly buying the house turns out to be a disastrous move.
QuoteIf you looked at a historical metric such as a comparison to rents, the price looks overvalued with the price 25x the rent. What is driving the relatively high valuation is the historically low interest rate and the high degree of leverage (just 10% down). There is no guarantee that both will continue to be available, but both show little evidence of going away soon.
I do agree that price to rent ratios are a bad metric in some ways, as it ignores the role of interest rate in setting the price of housing. In other ways, though, it's a good measure of instability in the housing market. The lower the interest rate, the more unstable and speculative things get after house prices compensate. That's because as interest rate goes down, the income from homeownership shifts from providing you shelter to price appreciation. Price to rent statistic does capture that.
Quote from: DGuller on July 23, 2009, 03:41:29 PM
Quote from: alfred russel on July 23, 2009, 03:22:07 PM
Which is 3% with inflation.
Yes, that's the assumption. However, the results change drastically based on the changes in that assumption. Assume 0% or 1% appreciation, and suddenly buying the house turns out to be a disastrous move.
If you are assuming 0% or 1% appreciation, that is negative price appreciation in real terms and I think is an overly conservative expected return. Obviously that is going to be painful if realized, but it would still be less painful than if you didn't buy the house and there were significant stock market declines (the presumed alternative investment). At least in terms of the assumptions I laid out for return rates: 3% for housing and 10% (after tax) for stocks, I don't think many people would adjust the expected returns so that they are less favorable to housing (maybe some of the other assumptions are vunerable, but I tried to be fair).
This ultimately comes down to a discussion of risk premium. Real estate is considered less volatile than stocks in the long term, but then the real estate we are discussing is not diversified (concentrated in your own home) and highly leveraged. Perhaps unfairly I equated those offsetting factors and said the risk premiums were equal. Unfairly because a 20% decline in stocks means that you lose 20%, while in a 10-1 leverage scenario with housing you would lose 200%. On the other hand, what we are going through indicates that losses are roughly capped for many people at 100%, with people walking away from their homes (in theory with the banks taking on that extra risk, though in fact much of it seems to be the government).
Quote
I do agree that price to rent ratios are a bad metric in some ways, as it ignores the role of interest rate in setting the price of housing. In other ways, though, it's a good measure of instability in the housing market. The lower the interest rate, the more unstable and speculative things get after house prices compensate. That's because as interest rate goes down, the income from homeownership shifts from providing you shelter to price appreciation. Price to rent statistic does capture that.
I have an instinctive aversion to anything approaching a PE ratio, but I agree you have a point about putting too much stock in low interest rate figures (theoretically you could impute large price changes from 1% interest rate changes). I still think you need to take into account interest rate changes when comparing periods. Anything equating the 1970s price to rent to today is nonsense, for example.
As an aside, what led me to believe that housing was over-inflated and poised for a crash was the human factor, not any particular analytical calculation. I sensed tremendous irrational exuberance when it came to the wisdom of buying a house, as many people were absolutely sure that it was an investment that can't fail, and yet would react very defensively when whatever passed for their logic was challenged. When you have such widespread irrational exuberance, you know that it is priced in, and that it's very fragile.
Quote from: DGuller on July 22, 2009, 12:01:21 PM
I do think it's nice to have someone with a little bit of foresight in position of running the economy.
Yeah, the Fed needs to appoint a full-time astrologer. ;)
Quote from: DGuller on July 23, 2009, 04:45:19 PM
As an aside, what led me to believe that housing was over-inflated and poised for a crash was the human factor, not any particular analytical calculation. I sensed tremendous irrational exuberance when it came to the wisdom of buying a house, as many people were absolutely sure that it was an investment that can't fail, and yet would react very defensively when whatever passed for their logic was challenged. When you have such widespread irrational exuberance, you know that it is priced in, and that it's very fragile.
The problem is DG is that people were (accurately) saying the same thing about the housing market for 10 years or more.
I somewhat remember a quote about a famous bear-market analyst saying that he had "successfully predicted 7 of the last 4 bear markets". Anyone can be a pessimist and be right when the market turns south. Anyone can be an optimist and be right when the market goes up. What is truly difficult is to predict a down market only when it is actually going to go down, and to predict a bull market only when it is going to go up.
Quote from: Barrister on July 23, 2009, 05:08:02 PM
The problem is DG is that people were (accurately) saying the same thing about the housing market for 10 years or more.
I somewhat remember a quote about a famous bear-market analyst saying that he had "successfully predicted 7 of the last 4 bear markets". Anyone can be a pessimist and be right when the market turns south. Anyone can be an optimist and be right when the market goes up. What is truly difficult is to predict a down market only when it is actually going to go down, and to predict a bull market only when it is going to go up.
I think that's very unfair. I did a little bit more than just be a permabear and predict that some point in the future, things would take a turn for the worse. I'm actually not a permabear, I turned bearish in 2004-2005.
I laid out my case for why I think the housing market is a bubble, and how the bursting of the bubble would set off a crisis. I also did it at a time when in retrospect it really was the beginning of the end, but not yet at a point where my conclusion was painfully obvious to everyone (although IMO it should've been).
I've been largely right on all points. The fact that the precise timing of the bursting of the bubble is impossible to predict is not a mark against bears.
Yeah to be fair, if you sold when DG said to sell, you would have missed a portion of the run up, but you would still be very far ahead net. I'd take that deal any day.
Quote from: DGuller on July 23, 2009, 04:45:19 PM
As an aside, what led me to believe that housing was over-inflated and poised for a crash was the human factor, not any particular analytical calculation. I sensed tremendous irrational exuberance when it came to the wisdom of buying a house, as many people were absolutely sure that it was an investment that can't fail, and yet would react very defensively when whatever passed for their logic was challenged. When you have such widespread irrational exuberance, you know that it is priced in, and that it's very fragile.
While I was wrong in not thinking the market would crash, I've been saying (and posting) for a long time that housing is not a great investment--the problem being it usually isn't a rent vs. buy decision, and people buy more house than they need thinking of it as an investment. The problem is that you buy more house than you need, you get a host of expenses that you wouldn't get otherwise.