FedUpUSA

Archive for January 5th, 2010

Baum Makes Mincemeat of Bernanke’s Twisted Logic

In Ivory Tower Doesn’t Have a Mortgage, Bloomberg columnist Caroline Baum makes mincemeat out of Bernanke’s twisted defense of Fed policy.

Bernanke takes great pains to rebut criticism that the funds rate was well below where the Taylor Rule, developed by Stanford economist John Taylor, suggested it should be following the 2001 recession.

Substitute forecast inflation for actual inflation, and the personal consumption expenditures price index for the consumer price index, and — voila! — monetary policy looks far less accommodating, Bernanke said.

It’s always easier to start with a desired conclusion and retrofit a model or equation to prove it.

What if easy money is a necessary but not sufficient condition to explain the magnitude of housing bubbles across countries?

The real fed funds rate was negative from 2002 to 2005, the longest stretch since the 1970s, a decade notable for high inflation and unemployment. The teaser rates lenders offered on ARMs were pretty close to zero when adjusted for inflation.

When you can borrow for free and invest in an asset whose price can only go up (at least that was the perception about home prices), guess what happens? Credit is misallocated. Lending standards decline. Everyone wants in.

Yes, monetary policy is a blunt instrument, as Bernanke pointed out. Keep rates too low — create too much money — and sometimes that money chases goods and services prices, which we designate as inflation. Other times it piles into certain assets, which we call a bubble.

“The best response to the housing bubble would have been regulatory, not monetary,” Bernanke said, avoiding any reference to prevention.

The two aren’t substitutes. Relying on regulation to counteract the impetus of easy money is like using a split-rail fence to stop an auto with the accelerator pressed to the floor. They are different species, operating in different spheres.

All the regulation in the world can’t counteract the power of near-zero interest rates. At the same time, high interest rates won’t prevent financial institutions from engaging in shady practices. To think regulation can prevent the next asset bubble is naive.

Why is the Fed so fixated on inflation expectations and so blase about asset-price expectations? Aren’t they of a piece?

Taylor Rule Nonsense

The highly respected Taylor Rule is fatally flawed because it only looks at the CPI, while ignoring asset bubbles in virtually anything else, including housing.

I have pointed this out many times, most recently in Ben Bernanke Looks In Mirror, Sees Barney Frank.

Bernanke blames inadequate subprime regulation for the housing bubble.

Bernanke also takes refuge in the Taylor Rule although there is considerable disagreement over what it says. My take is the Taylor Rule is fatally flawed because it fails to take into consideration housing prices (asset prices in general).

Watch what happens when the Case-Shiller Housing Index is substituted for Owners’ Equivalent Rent (OER) in the CPI.

Case Shiller CPI vs. CPI-U

click on chart for sharper image

The above is from What’s the Real CPI?

The Fed could have and should have acted to rein in property bubbles, but Bernanke is so dense he could not even see there was a property bubble.

Substituting home prices for OER the CPI was running a hot 6%+ in mid 2004 with the Fed Funds Rate near .25%.

Who’s The Bigger Fool?

1) Taylor in all his hubris for believing his fatally flawed rule is the only policy tool the Fed needs
2) Bernanke for relying on it to the point of insanity

Academic Wonks vs. Practicality

Bernanke is an academic wonk, totally incapable of looking at policy in terms of anything other than formulas and his twisted ideas about the great depression.

Baum on the other hand shows impeccable logic with…

Relying on regulation to counteract the impetus of easy money is like using a split-rail fence to stop an auto with the accelerator pressed to the floor. All the regulation in the world can’t counteract the power of near-zero interest rates.

Indeed.

When the price of money is too low, it is virtually guaranteed to cause speculation in something. In 2000 it was Nasdaq and technology speculation. This go around it was housing, followed by commercial real estate, followed by immense commodity speculation driving the price of oil to $140.

The moral of this story is loose money always finds a home.

It is beyond absurd we have a Fed chairman that does not understand that simple construct or for that matter basic economics in general.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Hint To Other Nations: Here’s The Bill

Posted by Karl Denninger

For your coddling of the banker cabal, that is.

Yes, that’s my view.  This sort of bluster and bullshit must not stand:

Dutch Finance Minister Wouter Bos would not be drawn into speculation on steps against Iceland. “But this can’t go on forever. We want our money back. We negotiated reasonably.”

Mr. Bos, go perform an indecent act on yourself.

You, along with the rest of the “western world”, were complicit in and willing partners with the criminal banking cabal that ripped off the entire world with their worthless securities.

You “negotiated” for the right to steal even more after you failed to lock up the banksters for their criminal conduct – for intentional concealment and fraud in their “marketing” of these securities to investors worldwide.

You, just as with those here in Washington DC, were fully complicit in the looting of the public that took place over the last decade and more.

YOUR GOVERNMENT has allowed institutions in your nation (and elsewhere) to claim that “debt is output” and that speculation constitutes GDP.  That’s a willful, knowing lie.

Britain is also weighing in with the following threat:

Myners (the British Financial Services Minister) told the BBC that if Iceland voted against the deal, it would cut itself off from the global financial system and from International Monetary Fund aid for its economy, one of the worst hit by the world bank crisis.

‘The Icelandic people, if they were to reach that conclusion, would effectively be saying that Iceland does not want to be part of the international financial system, that Iceland doesn’t want to have access to multi-national, national and bilateral funding and doesn’t want to be regarded as a safe counter-party with whom to do business,’ Myners said.

Mr. Myners, with all due respect (that is, none), may you be fornicated by a stallion.

“The City” has for literal hundreds of years been the hotbed of bankster corruption, greed and fraud.  Your nation is on record (in The Congressional Record no less!) as having sent bankster “representatives” over to this country shortly after it was formed for the explicit purpose of bribing our Congress into being recaptured after you lost the Revolutionary War!

I, for one, am tired of this game of “captured government” and it appears so is Iceland and its people.

It’s about damn time.

You and your ilk had every ability to stop the fraud and looting over the last several decades.  You could have prevented the blowing of your own property bubble and destruction of your federal budget, along with the insane expansion of leverage and “yield seeking” through fraudulent misrepresentation of risk and leverage but you didn’t do so.  Instead you, like the so-called “government regulators” in The United States, knelt before the banking cartels and performed obscene acts so frequently that you wore out sets of kneepads at a rate that kept Home Depot’s profit margins at a record during the decade of the 2000s.  

Now that the bubble has burst you’re whining that you’re going to have to eat the product of your own cooking and willful blindness.

To that I say: Tough crap.

Start locking up the jackasses who did this to the global economy instead of kneeling before Zod for yet more obscenities.  You know who they are.  Just walk down any of your much-vaunted “streets” in “The City” and where you see a $5,000 suit apply a pair of handcuffs.

If you won’t and don’t I predict that it will not be long before the reaction of the Icelandic people spreads – including to the UK.

Whether the people of your country will give you the opportunity to do the right thing when, not if that sentiment spreads is something you may wish to ponder.