Economy | timiacono.com - Part 4

Easy Money and Asset Bubbles

You’d think that, at some point, central bankers around the the world will collectively wake up and smell the coffee vis-a-vis monetary policy and asset bubbles. A few encouraging signs were seen just today, first from an NBER working paper titled Betting the House in which, despite assurances to the contrary from former Fed Chief Ben Bernanke, there might indeed be a strong link between easy money and asset bubbles:

We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.

The other quasi-revelation comes from the St. Louis Fed where researchers stumbled across the first housing boom that didn’t require broad participation from homeowners:

They fail to make a connection between easy money and soaring prices, simply noting:

The data suggest that this is the first national housing boom in the postwar era that has not been supported by an increased demand for owner-occupied housing. This current episode could solidify the idea that it is possible to have housing booms driven entirely by investors. Therefore, it is no longer clear going forward that the homeownership rate provides a good predictor of future house prices.

Clearly, easy money from the Fed fueling demand from said “investors” was a step too far…

“Smooth Exit”

I couldn’t help but get a good chuckle at the couple of paragraphs below that appeared midway through this Bloomberg story that sung the praises of Federal Reserve Chair Janet Yellen who is rapidly approaching her one-year anniversary as central bank chief.

Granted, the phrase “smooth exit” is not Ms. Yellen’s and it only appear in bold type above as a result of Bloomberg’s slightly annoying practice of not allowing readers to take in more than a Twitter-size chunk of small text before getting to a few simple words in big text again (in itself, kind of a sad commentary on how things are evolving).

Nonetheless,  given the history of the nation’s central bank over the last couple decades, a history that has been replete with bursting asset bubbles (and Yellen is clearly cut from the same Greenspan/Bernanke cloth), it seems a “smooth exit” is setting the bar far too high.

Perhaps “No Calamity” or “No Apocalypse” would have been better.

It Didn’t Have to Be This Way

Stephen Roach talks to Kelly Evans of CNBC about how the Federal Reserve is currently making the same mistake it made during the last two asset bubble inflations.

Coming up on the 10-year anniversary of this blog in March, it’s worth pointing out that Roach graced the very first post (on the old blog), noting the following:

“It didn’t have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster — the asset-dependent American consumer and a co-dependent global economy that can’t live without excess US consumption. The real test was always the exit strategy.”

Not much has really changed at the Fed, or so it seems…

Trouble in the Oil (and Debt) Patch

This WSJ story ($) detailing the sharp increase in U.S. shale oil related debt along with Texas energy company WBH Energy LP going belly-up prompted this item from Russia Today.

The funny thing is that, absent any coordinated action, oil producers around the world are likely to cause an even bigger glut (and even lower prices) over the short-term as they attempt to compensate for prices that have already tumbled more than 50 percent.

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