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Apparently, Fed Chief Ben Bernanke had a fairly interesting visit with elected officials on Capitol Hill today, at least judging by this exchange with Rep. Paul Ryan (R-WI).
It’s kind of amazing that, nearly four years after the financial crisis, Fed economists still think that interest rate policy during the housing bubble mania had little or nothing to do with its formation or subsequent bust.
With Mitt Romney pulling away from both Newt Gingrich and Ron Paul in their bid for the GOP presidential nomination, hopes are now dimming that Jim Grant of Grant’s Interest Rate Observer will play an important role in the nation’s monetary policy going forward as Grant is increasingly unlikely to either sit on a new Gold Commission (as suggested by Gingrich) or head the Federal Reserve (as Ron Paul recommended), in the latter scenario, perhaps just exchanging dollars for gold under a new gold standard until such time that the central bank can be disbanded. In this report at MarketWatch, Brett Arends fills in the details:
“Unfortunately, I haven’t heard from Mr. Romney yet,” joked Grant when I called on him in his offices down on Wall Street. “I’m sitting by the phone, I’m ready.”
He may have to wait some time. Romney, a conventional Wall Street figure, is unlikely to tap him anytime soon.
…
He is best known these days — to Gingrich and Paul, among others — for his long-standing support for the gold standard. The world has moved in his direction. In 12 years, gold has risen from a derided relic trading at $250 an ounce to a hot investment at $1,750. Everywhere paper currency systems are under challenge. In 2008, the world discovered that you can’t just manufacture endless wealth out of thin air, as the gold bugs had long argued, and it is still struggling with the realization.Many people will think of the gold standard as a relic of a bygone era, something as old-fashioned as bow-ties and stuffed animals. (My caveat: To me, that’s not an insult.) Grant, when we met, argued the reverse. He says paper currencies and our current monetary system are the ones that are out of date.
“The anachronism is today’s system,” he says. We have a “command and control, top down” system where the Fed imposes an interest rate on society. The Fed, in other words, tells us what the price of money should be. It is, Grant says, at odds with the modern age. “We live in a world of collaborative social networks” of the Internet and Facebook, of Wikipedia instead of the old World Book, and so on. And yet when it comes to the price of money, we wait for a committee that sits in private to tell us what it should be”.
There’s lots more in this story on Grant’s views of the financial system as currently constructed and what he would do if he were to sit in Ben Bernanke’s chair at the Fed. If you ask me, his gold standard price of $2,500 an ounce for the metal seems a bit low.
After many failed attempts, the Obama Administration takes another whack at bolstering the nation’s housing market, this time by offering $5 to $10 billion in government aid for underwater homeowners to refinance their mortgages as detailed in this WSJ report.
On the one hand, you have to feel for homeowners who have continued to make their mortgage payments despite the declining value of their home, but can’t refinance at today’s freakishly low rates. But, on the other hand, you have to scratch your head about the government intervening to create new loans for more than theses homes are worth.
Those worrying about the latter shouldn’t be too concerned, however, as not much is likely to happen in Congress during this increasingly heated election year.
Not surprisingly, I’m going to have to agree with both Yale Economist Robert Shiller in this Business Insider interview and Barry Ritholtz at his Big Picture blog in arguing that a housing bottom – if it does indeed arrive in 2012 – will prove disappointing for those expecting gains on their real estate investment in 2013 or 2014.
As shown to the right using the mid-1990s Los Angeles housing market as an example of what might happen to national home prices in the years ahead, housing market bottoms are long drawn out affairs.
We happened to be living in Southern California at the time and had the good fortune to buy a house there in 1995, though, we were just looking for a place to live, not thinking of it as an investment.
I remember the price actually declined by another five percent or so in the year after we bought it and it wasn’t until five or six years later that we began to hear about rising home prices, a bit surprised to learn that the value of our place had increased by $100,000 or more.
But, for the first few years, you were better off not even thinking about home values.
Using the broad Los Angeles price index as an example, even if you had bought at the absolute bottom in February 1996, you’d have had less than a one percent gain a year later.
The index spent a full four years within five percent of the February 1996 low!
Anyone thinking that a housing market bottom in 2012 means that home prices will be higher next year or the year after that will probably be disappointed.
Moreover, given the size of the recent boom and the likelihood of the bust being of similar magnitude, I wouldn’t be surprised if home prices don’t post a substantive advance for the rest of the decade.
It’s nothing like Vancouver, but, by U.S. standards, the ongoing housing boom in the nation’s capital is rather impressive, a point made clear in the graphic below from this Washington Post story following the release of the latest Case-Shiller home price data.
Note that the November index values for Detroit, Atlanta, Las Vegas, and Cleveland wouldn’t show up on the chart above as they have all fallen below the 100 mark, the latter three areas having done so over the last year or so while Detroit made the plunge back in early-2008, now sitting at a stunning 70.66 after falling another 2.4 percent.
Interestingly, after hosting one of the more spectacular bubbles last decade, Miami’s housing market is now within a point of the 20-city index.
Following word that home prices continued to fall last fall as noted here earlier today, news comes from the Conference Board that consumer confidence declined for the first time in three months, down from an upwardly revised 64.8 in December to 61.1 in January.
Importantly, this is the first major gauge of the mood of the consumer to reverse course in recent months as, apparently, those holiday credit card bills have begun to take a toll.
Recall that a surprising surge in credit card usage during the fourth quarter was credited with driving holiday sales higher and, now that those November and December charges are starting to show up in mailboxes in January, the mood is not quite as festive.
Well, gasoline prices starting to rise again doesn’t help either…
The present situation component nearly reversed last month’s gain, falling more than 8 points to 38.4, while the expectations component also declined, from 77.0 in December to 76.2 in January. One-year inflation expectations rose from 5.3 percent to 5.5 percent, in stark contrast to Fed Chief Ben Bernanke’s claim that inflation is too low.
By Tim Iacono, Since 2005
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