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Bernanke and Greenspan: Wunnerful, wunnerful

Somebody stop the bubble machine!

The New Yorker on Bernanke's debacle. There are many, many incidents that give one pause, but this one stands out for me:

The other event that changed Bernanke’s career occurred in the summer of 1999, at the height of the Internet stock boom, when he and Gertler were invited to present a paper at an annual policy conference organized by the Federal Reserve Bank of Kansas City. The topic of the conference—which takes place at a resort in Jackson Hole, Wyoming—was New Challenges for Monetary Policy. Then, as now, there was vigorous debate among economists about whether central banks should raise interest rates to counter speculative bubbles. By increasing the cost of borrowing, the Fed, at least in theory, can restrain speculative activity and prevent the prices of assets such as stocks and real estate from rising excessively.

Bernanke and Gertler argued that the Fed should ignore bubbles and stick to its traditional policy of controlling inflation. If a bubble inflated and burst of its own accord, they said, the Fed could always bring down rates to alleviate damage to the broader economy. To support their case, they presented a series of computer simulations, which appeared to show that a policy of targeting inflation stabilized the economy more effectively than one that targeted bubbles. The presentation got a mixed reception. Henry Kaufman, a well-known Wall Street economist, said that it would be irresponsible for the Fed to ignore rampant speculation. Rudi Dornbusch, an M.I.T. professor (who has since died), pointed out that Bernanke and Gertler had overlooked the possibility that credit could dry up after a bubble burst, and that such a development could have serious effects on the economy. But Greenspan was more supportive. “He didn’t say anything during the session,” Gertler recalled. “But after it was over he walked by and said, as quietly as he could, ‘You know, I agree with you.’ That had us in seventh heaven.”

No doubt. Hit the theme, boiz!

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badger's picture
Submitted by badger on

Bernake did raise rates (in response to the housing bubble and oil prices, but probably in the context of controlling inflation), and that's what started the whole thing unravelling.

It seems like historically, bubbles have been in things unrelated to the general economy - speculation is tulip bulbs or related to the South Seas or just stock speculation - but in this case, the bubbles were in two essentials: housing and energy. How do you distinguish between high gasoline prices being due to speculation in oil markets vs. just being due to inflation?

I doesn't seem to me there's a difference (as relates to outcomes) in the case of essential commodities.

Submitted by ohio on

the idea of the latest housing bubble as as a failure in a commodity market. What I mean is that while people need somewhere to live, they don't necesarily need to live in McMansions. Easy credit, the weird disconnect between rising home prices and easy credit (people believing the value of their house will always go up and forgetting that this value is directly related to credit accessibility), and so on, meant people were buying more than shelter---they were buying (or thought they were buying) a wealth-generating machine.

Yes? Or am I wearing my own ass for a hat? If so, then we're past housing as commodity and into speculation. And it relates to the dot com extravaganza in that the first piece of advice people gavae you when you went to buy a new computer was to spend as much as you possible could on your new machine, regardless of whether you needed that capabaility or not.

I haven't quite formulated what I mean by any of this, and it may be a minor point in the merde pile de grande et extraordinaire as we quasi-French* say, but regardless, my thoughts are spinning and the spinning was not helped by this New Yorker article. There seemed to be a fundamental gap between what Bernanke, et al, were doing and the way regular folk make stuff or offer services they sell with which to live.

As I read the entire article, I had the strange thought that none of these folks could explain to me in one sentence exactly how their rescue plan was supposed to work. If you can't explain it in one sentence, you don't really understand it.

Ultimately, I think failing to deliver on a HOLC-style plan will come back to bite us each in the ass. Perhaps Pres-elect Obama is going to unveil something on January 21st, but it's hard to get programs like HOLC up and running properly, much less quickly, and February is going to be very, very ugly. January unveiling may be good theater, but it may be too late.

Now that's a cheery thought.

Pardon my scattershot thinking here. I just read some articles by Soros and I really want to take away his thesaurus.

* quasi-French as being both one whose grandmother was French Canadian and who eats french fries and french toast with enthusiasm.

Submitted by lambert on

Reflexivity is the same as "we create our own reality." The mindset is everywhere -- even where it is not appropriate.

badger's picture
Submitted by badger on

but I'm not completely sure what it is either. It's why I modified "commodities" with "essential", and you're correctly pointing out that a lot of what was sold in the housing market was inessential.

If I knew more about Marxism and "commodity fetishism", I might have something more intelligent to say about it, as it seems to be near or in that kind of category.

What I would say is that for many of us who view housing primarily as an essential and a set of functions to be efficiently performed (which, from your posts, seems to include your point of view) - we still have to live with the consequences of greed, conspicuous consumption and status-seeking in the housing market. It affects us economically in how much we have to pay just to secure housing, however minimal (a double-wide on a small lot in the town I live near goes for way over $100K). Now it affects us too in how it's driving the collapse of the entire economy.

But in the way it drove up everyone's housing prices, speculative excess in a commodity like housing still looks a lot like inflation to the person who basically just wants a warm, dry place to live. Which is a lot different than the price of tulip bulbs or AT&T stock being out of the reach of all but those willing to pay speculative prices.

Submitted by ohio on

"What I would say is that for many of us who view housing primarily as an essential and a set of functions to be efficiently performed (which, from your posts, seems to include your point of view) - we still have to live with the consequences of greed, conspicuous consumption and status-seeking in the housing market."

Yeppers. And golly, howdja guess I'm a housing essentialist*? I am so subtle about these things.

I'm with you on the last para, too. But it is a strange thing, isn't it, to try to break down the essentialist side of the market from the speculative? Suffice that I'm thinking the speculative side of the market was much, much larger than the essentialist side, though many speculators never thought of themselves as speculators. But I am stating the obvious.

Regardless, I think a return to the artificial inflation of housing prices would be disasterous to the long-term financial health of us regular folk, yet I'm puzzled as to how to approach the issue of wealth destruction caused by the bursting of the bubble.

*Totally made-up term.