The Mess That Greenspan Made - Part 414

The Fed’s Housing Bubble Laughter

The Federal Reserve transcripts from 2006 released ten days ago continue to reverberate around the internet as the central bank has become a laughing stock for being so unaware of the U.S. housing bubble that was inflating to dangerous levels throughout the year.

Dean Baker’s Alan Greenspan’s ship of fools from last week is well worth reading if for no other reason than to learn what former Fed governor Frederic Mishkin was thinking late that year and I recently came across this item at The Daily Staghunt blog that charted how much laughter appeared in the transcripts over the years.

While Fed economists are purportedly a funny lot, it does look pretty bad to see increasing joviality at a time when they could have been doing something about the housing bubble.

The FOMC (Federal Open Market Committee) meets this week and they are expected to announce of a new communication initiative with two key features – expanded interest-rate projections and an explanation of their objectives for inflation and employment. Fed Chairman Ben Bernanke will surely discuss these in detail in the press conference after the meeting and, though normally keen on audience engagement, he’ll probably be hoping that he’s not asked about the 2006 transcripts.

If we’re really lucky, someone will ask him about this chart.

The Best of the Bozeman Police Reports

Culled from the Police Reports page of the Bozeman Daily Chronicle come the best of the Bozeman police reports from the last week along with some items from the Sheriff’s Office. Note that a new book featuring the very best of these police reports is now available from the Chronicle for only $10 – just click on the banner below to find out how to order.

Yes, there’s been a noticeable improvement in the police reports lately as, apparently, unseasonably warm weather and the lack of snow have compelled some of the citizenry to behave as though it’s summertime, out and about in the wee hours of the morning after imbibing too much. Even the reports that are not alcohol-related are quite entertaining, such as the first two items in the list, and I didn’t know that law enforcement officials could track down a stolen iPhone as easily as described in the fifth item below.

  • A man said his computer is being attacked from a wireless router. This has never happened to him before and he is visiting Bozeman. He said it is ruining his vacation.
  • The driver of a compact car traveling slowly near Gallatin and Little Bear roads wouldn’t pull over so others could pass. The driver would also speed up in areas where other drivers had a chance to pass, keeping them from passing.
  • A drunken man threw a pint glass at a bartender at a Main Street bar and then ran away.
  • A drunken man was seen at the intersection of South Grand Avenue and West Alderson Street, lying in the street with his head in front of a vehicle’s driver’s side tire around 6 a.m. The man was taken to the hospital.
  • Police tracked down a jacket, purse and iPhone stolen from a woman at Bar IX using her iPhone’s tracking software. The items were found in the bathroom with $20 missing from the wallet.


Existing Home Sales Up, Inventory Down

The National Association of Realtors reported that sales of previously owned homes rose 5.0 percent in December to a seasonally adjusted annual rate of 4.61 million, up from a downwardly revised rate of 4.39 million in November, and the median home price rose nearly $4,000 to $164,500 last month, down 2.5 percent from a year ago.

Total housing inventory fell 9.2 percent to 2.38 million units last month, the lowest level since March of 2005, and the months of supply metric dropped from 7.2 months in November to 6.2 in December, the lowest level since 2006.

Distressed sales accounted for 32 percent of all transactions – 19 percent foreclosures and 13 percent short sales – and all-cash sales accounted for 31 percent of purchases as the share of sales made to investors seeking bargains rises at this time of the year since many traditional buyers wait for better weather in the spring or schools to let out in the summer.

Record low mortgage rates, an improving labor market, and rising consumer confidence in recent months have all combined to spur home sales, however, a backlog of foreclosures now working their way through the system in the wake of the “robo-signing” scandal last year may soon change the current supply/demand balance.

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On Root Cause(s), Four Years Hence

I’ll get to the existing homes sales report in just a bit, but, before doing so, I wanted to point readers to this commentary by Jonathon Weil at Bloomberg today that points out one of the most disturbing aspects related to the nexus of politics and finance today – the ongoing partisan divide over what caused the financial crisis a few years back.

The way the discussion gets framed tends to go like this: Did Fannie and Freddie cause the crisis? Although this is the wrong question, I’ll try to answer it anyway by highlighting the difference between the meaning of the words “a” and “the.”

Here goes. Fannie Mae was a cause of the financial crisis. So was Freddie Mac. U.S. government housing policies, which often encouraged people to take out loans they couldn’t repay to buy homes they couldn’t afford, were also a cause. None of these was “the” cause of the crisis, because there was no single cause.

Two people often cited as proponents of the notion that Fannie and Freddie caused the crisis are Peter Wallison and Edward Pinto. Both are fellows at the American Enterprise Institute, a Washington think tank. Wallison was a Republican member of the Financial Crisis Inquiry Commission who wrote a 98-page dissent to the panel’s final report in 2011.

Last month, in an article responding to a column by Joe Nocera of the New York Times, Wallison and Pinto framed their thesis this way: “Our argument is and has been that the financial crisis would not have occurred but for government housing policy implemented principally through Fannie and Freddie and the Department of Housing and Urban Development.”

It’s a debatable, if not a particularly useful, observation. One reason Wallison and Pinto have drawn so much criticism for their work is that they consistently dismiss every other possible cause of the crisis, so that only Fannie, Freddie and U.S. housing policies survive the scholars’ own “but for” test. Never mind interest rates held too low for too long, worthless regulators or banks with excessive leverage, for instance.

Even New York Mayor Bloomberg came down in the “the cause” camp a month or so ago when referring to the role the government played in the housing bubble. It’s simply amazing to me that so many people seem to insist on viewing this as a black-and-white issue – that either Washington or Wall Street are to blame, but not a combination of the two.

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Debt ‘Round the World

Today’s Daily Chart from the The Economist is chock-full of fun and interesting data on public and private sector debt around the world and, based on the graphic below, us Anglo-Saxons are clearly outpacing the rest of the world when it comes to household debt.

Of course, Japan is the unquestioned leader in government debt – about double that of second place Italy – but, flipping through the tabs of this interactive graphic reveals that, overall, the U.K. is the worst of the lot … it’s a good thing they can print their own money.

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