Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18
More on that Gold and Silver Ratio 'Deviant Conundrum' - 13th Jun 18
Silver Shares? Nobody Cares - 13th Jun 18
What Happens to Stocks, Forex, Commodities, and Bonds When the Fed Hikes Rates - 13th Jun 18
Gold and Silver Price Setting Up for A Sleeper Breakout - 13th Jun 18
Tesla Stock Analysis - 12th Jun 18
What Happens Next to Stocks when Russell Goes up 6 Weeks in a Row - 12th Jun 18
Gold vs. Stocks: Ratios Do Not Imply Correlation - 12th Jun 18
Silver’s Not-so-subtle Outperformance - 12th Jun 18
Why You Should Brace Yourself for Big Financial Changes - 11th Jun 18
Inflation to Skyrocket When Fed Reverts to New QE & Interest Rate Cuts - 11th Jun 18
Stock Market Topping Pattern or Just Consolidation? - 11th Jun 18
Study: What Happens Next to Stocks When the Put/Call Ratio is Very Low - 11th Jun 18
G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - 11th Jun 18
SPX Unshackled - 11th Jun 18
When Trump Met Fibonacci And Won - 11th Jun 18
FREE Theme Park Entry with Cadbury's Choc's! Legoland, Alton Towers, Chessington.... - 11th Jun 18
Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - 10th Jun 18
End of the World Stock Market Chart! - 10th Jun 18
All US Homes Are Overvalued - 10th Jun 18
Thorpe Theme Park London Car Park Exit Nightmare - Drivers Beware! - 10th Jun 18
Gold Price Summer Doldrums - 9th Jun 18
How to Prepare for Economic Uncertainty with Gold and Silver - 9th Jun 18
5 "Tells" that the Stock Markets Are About to Reverse - 9th Jun 18
Billionaire Schools Teacher in NAFTA Trade Talks - 9th Jun 18
Land Rover Discovery Sport ECO Mode Real World Driving MPG Fuel Economy - 9th Jun 18
Crude Oil Bullish Weekly Reversal vs. Bearish Monthly Reversal - 8th Jun 18
Fed’s Interest Rate Hike is Short term Bearish for Stocks - 8th Jun 18
The Deviant Conundrum Called Silver - 8th Jun 18
Pleasure Island Theme Park Cleethorpes, Last Day Trip Before it Closed Down - 8th Jun 18
America’s One-sided Domestic Financial War - 8th Jun 18
Debt Consolidation Advice: When and Why to Consolidate - 8th Jun 18
Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - 8th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Bernanke Says "Easy Money did not Cause the Housing Bubble"

Housing-Market / US Housing Jan 07, 2010 - 04:07 AM GMT

By: Mike_Whitney

Housing-Market

Best Financial Markets Analysis ArticleIn an effort to defend himself against his critics, Fed chairman Ben Bernanke spent over 2 hours at the Annual Meeting of the American Economic Association in Atlanta trying to prove that low interest rates were not the main cause of the housing bubble. Here's an excerpt from Bernanke's speech:


"Some observers have assigned monetary policy a central role in the crisis. Specifically, they claim that excessively easy monetary policy by the Federal Reserve in the first half of the decade helped cause a bubble in house prices in the United States, a bubble whose inevitable collapse proved a major source of the financial and economic stresses of the past two years...

With respect to the magnitude of house-price increases... Economists who have investigated the issue have generally found that, based on historical relationships, only a small portion of the increase in house prices earlier this decade can be attributed to the stance of U.S. monetary policy."

Bernanke is right in saying that the majority of economists now believe that exotic mortgages and lax lending standards were the main cause of the bubble. But that doesn't mean that the Fed's accomodative monetary policy didn't play a big part, too. When the Fed lowers the price of money below its inflation-adjusted value, it provides a subsidy to borrowers. That leads to a flurry of speculation which helps to rev up economic activity and lift the economy out of recession. But there are unintended consequences to loose monetary policy as well, like the emergence of gigantic asset bubbles. Whether low interest rates were the "primary" cause of the housing bubble or not is irrelevant. The point is, bubbles can always be contained by raising rates and reducing the flow of credit. No one doubts that if ex-Fed chair Alan Greenspan had raised rates by a full percentage point in 2003, the frenzied spending in real estate would have slowed dramatically.

Also, keep in mind, that Bernanke continued to deny the existence of the housing bubble well into 2005, even though housing prices in many areas of the country had more than doubled in less than 7 years. Here's a clip from an article in the Economist (2005) with some of the facts that were circulating at the time.

--"The total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nation...

--23 percent of all American houses bought last year were for investment, not owner-occupation, showing that speculation in the real estate market is rampant. CNBC reports that in Miami, a hotbed of condominium building, an estimated 70% of condo buyers are investors/speculators, and not residents.

--Due to various new forms of riskier mortgages, 42 percent of first-time buyers – and 25 percent of all buyers – made no down payment on their home purchase last year, the NAR disclosed, making them especially vulnerable to a downturn in resale prices.

--In California, 60 percent of all new mortgages this year are interest-only or negative-amortization. These loans are gambles that prices will continue to rise."

Home prices were shooting through the roof, but neither Bernanke nor Greenspan did a thing to dampen the spending-spree. Both men shirked their regulatory duties and simply looked the other way while Wall Street and the big banks raked in hundreds of billions of dollars on the mortgage orgy.

Bernanke again: "For our part, the Federal Reserve has been working hard to identify problems and to improve and strengthen our supervisory policies and practices, and we have advocated substantial legislative and regulatory reforms to address problems exposed by the crisis."

Nonsense. Bernanke and his allies in congress have put the kibosh on new regulations and made sure that securitization, off-balance sheet operations, capital requirements, executive compensation and derivatives-trading all stay the same. The Fed is a ferocious defender of the status quo despite the obvious risks that present activities pose for the economy.
Nothing has changed; Bernanke and Co. have made sure of that. The only thing keeping the system upright, is explicit government backing; the "full faith and credit" of the US Treasury. Without Uncle Sam's blank check, the system would collapse tomorrow.

Bernanke again: "With respect to the magnitude of house-price increases...At some point, both lenders and borrowers became convinced that house prices would only go up. Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages."

Bernanke sounds like he just can't grasp why investors behaved so irrationally. Could it be because Maestro Greenspan was using his credibility as head of the central bank to promote the various mortgage products? Here's a quote from Greenspan before the bubble burst:

"Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to the rapid growth in subprime mortgage lending…fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”

Hurrah, for subprime, cries Greenspan.

And who was the champion of mortgage-backed securities, a market which shrunk from $700 billion to $10 billion in the last year and a half?

Greenspan again: “The development of a broad-based secondary market for mortgage loans also greatly expanded consumer access to credit. By reducing the risk of making long-term, fixed-rate loans and ensuring liquidity for mortgage lenders, the secondary market helped stimulate widespread competition in the mortgage business. The mortgage-backed security helped create a national and even an international market for mortgages, and market support for a wider variety of home mortgage loan products became commonplace. This led to securitization of a variety of other consumer loan products, such as auto and credit card loans.”

And who was Wall Street's most enthusiastic pitchman for derivatives, garbage loans, and the wide assortment of dodgy debt-instruments?

Greenspan again: “Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers.”

Greenspan spearheaded the public relations campaign for Wall Street, heaping praise on every leverage-enhancing innovation while turning a blind-eye on regulation. He was supported throughout his tenure by his right-hand man, Ben Bernanke. Both men are equally guilty.

True; low interest rates were not the main cause of the housing bubble, but they did create a suitable environment for the bubble to expand to catastrophic proportions and push the world economy into deep recession. Greenspan and Bernanke did not cause the crisis, but they were its enablers, which is even worse.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2010 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules