WatchBernanke Says Promoting Financial Stability Is Key Fed Role
By Joshua Zumbrun and Daniel Kruger
http://www.bloomberg.com/news/2012-04-13/bernanke-urges-greater-focus-on-promoting-financial-stability.html
'Responding to audience questions after the speech, Bernanke said evidence is “weak” that low central bank interest rates contributed to the housing bubble.'
In the oft misquoted words of the immortal Mandy Rice-Davies, "Well, he would say that, wouldn't he?"
http://en.wikipedia.org/wiki/Mandy_Rice-Davies
Mandy Rice-Davies (born 21 October 1944), is a British former model and showgirl best known for her role in the Profumo affair and her association with Christine Keeler, which discredited the Conservative government of British Prime Minister Harold Macmillan in 1963...While giving evidence at the trial of Stephen Ward, charged with living off the immoral earnings of Keeler and Rice-Davies, the latter made a famous riposte. When the prosecuting counsel pointed out that Lord Astor denied an affair or having even met her, she replied, "Well, he would, wouldn't he?" (often misquoted as "Well he would say that, wouldn't he?"). By 1979, this phrase had entered the third edition of the Oxford Dictionary of Quotations.
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47 male
Lafayette, CA
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Bernanke is right. It's a myth that the federal reserve controls interest rates. At best, they are able to nudge rates higher or lower but the effect has been diminishing in recent years and it's doubtful they had any effect on the housing bubble.
When you eliminate all the bullshit, the fed only controls two things:
1. The federal funds rate (what banks charge each other for short term money)
2. The discount rate (what the fed charges banks for short term money)
There are other exotic actions like QE and TARP, but these didn't exist during the housing bubble.
So for all the noise about fed policy, they really only influence short term bank credit. They can influence a bank's willingness to lend, and encourage or discourage excess reserves, but contrary to popular belief banks have almost nothing whatsoever to do with mortgage loans.
Where banks participate in mortgages, they are almost entirely conforming paper that is either sold or insured by the pseudo-governmental agencies of Freddie and Fannie. That was until the invention of fraudulent mortgage bonds. A typical 2005 mortgage transaction goes like this:
1. Some dope writes a mortgage for any amount at any interest rate
2. That bad mortgage is combined with other bad mortgages into a series of bonds.
3. A fraudulent ratings agency slaps a AAA sticker on the bonds certifying that they are golden.
4. A dishonest broker on Wall Street finds some chump to buy them.
5. The cash is returned to the mortgage market to loan again.
It's important to realize that banks are not required at all for this transaction. Sometimes they participate, however since the bank is not at risk for any of the money it doesn't care what the federal reserve target rates are. Margins are irrelevant because ratings agencies are going to sign off on anything. If the bond market sends rates higher, no one cares because none of this money is going to be paid back anyway. Is there a difference between a 5% mortgage with a 1% teaser rate and a 10% mortgage with a 1% teaser rate? No.
You can see things going off the rails in this chart. The problem was not the federal reserve. The problem was not Freddie and Fannie. The problem had nothing to do with how low interest rates were, in fact they are far lower today and still no new bubble. It was ENTIRELY due to deregulation through reckless Republican legislation and Bush's hands off policy towards oversight. There are no other causes needed.
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Bellingham, WA
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iwog says
There's an important point to be made here.
The events of 2002-2007 featured initially a housing *boom* which soon turned into a bubble, around 2004 I guess.
The Fed certainly got the housing boom going in 2002 with its interest rate drops, but the bubble prices of 2004-2006 were supported by suicide lending -- negative-am, 2-year IOs with teaser rates -- that had little to do with the official Fed rate.
Prices didn't crash because the Fed raised rates, prices crashed because the borrowers of 2004-2006 couldn't repay their loans, since they were suicide loans dependent on continued appreciation to refinance, and the appreciation train stopped in mid-2005.
Edit: i see you say this exact thing later
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Albany, NY
mondoqt's website
From The Economist, 03/18/10
It wasn't us: Alan Greenspan and Ben Bernanke still do not believe monetary policy bears any blame for the crisis
http://www.economist.com/node/15719180
'The desire to rescue a damaged reputation is a powerful motivator. That is one conclusion to draw from a new 48-page paper written for the Brookings Institution by Alan Greenspan, the 83-year-old former chairman of America’s Federal Reserve...The most combative section in Mr Greenspan’s paper—arguing that monetary policy in the early 2000s was not a cause of the housing bubble—is strikingly similar to a speech given by Mr Bernanke at the American Economics Association’s annual meeting in January...
There is something odd about central bankers denying any responsibility at all for long-term rates, which are, in principle, based partly on an assessment of a stream of short-term rates. Nor is it clear that low short-term rates were as irrelevant as Messrs Bernanke and Greenspan suggest. Jeremy Stein of Harvard University, a discussant of Mr Greenspan’s Brookings paper, points out that low policy rates may have mattered a great deal for income-constrained borrowers. He points out that adjustable-rate mortgages were used much more in expensive cities, a trend that became more pronounced as the fund rates fell.
By looking only at the effect of monetary policy on house prices, Messrs Bernanke and Greenspan also take too narrow a view of the potential effect of low policy rates. Several economists have argued convincingly, for instance, that low policy rates fueled broader leverage growth in securitised markets.
Monetary policy may be a blunt tool to deal with asset bubbles. But that does not mean it is irrelevant. Interestingly, one American central banker has a more nuanced view, arguing that “in the current episode, higher short-term interest rates probably would have restrained the demand for housing by raising mortgage interest rates…In addition, tighter monetary policy may be associated with reduced leverage and slower credit growth.” That was Janet Yellen, president of the San Francisco Fed, who is likely to be Mr Bernanke’s new vice-chairman. With luck, she will prompt her boss to have a rethink.'
(Janet Yellen did indeed become Vice Chair of the Board of Governors of the Federal Reserve System, but has yet not prompted a Bernanke "rethink".)
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47 male
Lafayette, CA
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The fed rates are generally not irrelevant, but they were irrelevant during the bubble.
At no point between the acquisition of capital to the funding of a loan did anyone care what bank interest rates were at. The only reason they cared about interest rates at all was to make sure their precious AAA mortgage bonds earned slightly higher than competitive government debt.
Had the discount rate been -10% or +20% it wouldn't have affected this transaction at all.
You also have to keep in mind that rates are like a flock of birds that move together even if they have no apparent connection. By the time the fed decides to move rates up or down, the market is way ahead of them.
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Belmont, CA
iwog says
Why not allow a thorough audit. They also buy things from the government that nobody else will buy to manipulate interest rates. They also have things on the balance sheet they dont want people to see.
You seem to benefit from this manipulation of the cost of money. Which leads me to believe you are passing the buck - you are leveraged or enjoy leverage and you pass the cost of that to others to make a profit.
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Belmont, CA
iwog says
So why didnt Dodd-Frank bring back glass-steagall? And who didnt have a role in eliminating glass-steagall - all of washingTOON did that.
Your fantasy about believing that there are two factions in the federal government is amazing. You are smart enough to know from Pelosi to Cantor, nobody but the upper echelons in society are winning.
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Mick Russom says
Because it was impossible. Republicans blocked it although some Democrats attempted to add the amendment.
Mick Russom says
My fantasy? The Buffet tax bill died in the Senate with a vote of 51 to 44. 50 Democrats voted for it and 43 Republicans voted against it.
People who don't think there's a fundamental difference between Democrats and Republicans are lazy, uninformed, and attempting to find common ground.
There isn't any common ground. Republicans are deadly to this economy and to this country. End.
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iwog says
Which shows Republicans to be the extremists they really are. "What, Buffet should pay at least the same rate as his secretary? Why that's crazy."
iwog says
Well said. Like Bill Maher said, we basically have a center-right party (the Democrats) and a CRAZY party (the Republicans).