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I’m Forever Blowing Bubbles

Monday January 21st, 2013   •   Posted by Burt Abrams at 11:13am PST   •  

480px-Ben_Bernanke_official_portraitBen Bernanke and his Federal Reserve Bank seem to be determined to reinflate the real estate bubble. Ben was blind-sided by the bursting of the bubble in 2006 as evidenced by his earlier CNBC interview:

“Well, I guess I don’t buy your premise [that there is a real estate bubble]. It’s a pretty unlikely possibility [a housing price collapse]. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”
Ben Bernanke, Chairman of the Federal Reserve System, July 1, 2005

The Fed is no longer content to flood banks with liquidity just by purchasing government bonds. It now directly intervenes in the mortgage market, buying mortgage-backed securities in the billions of dollars each month in order to keep mortgage rates low. The Fed wants real estate prices to rise to get consumers buying again. However, by 2012 real estate prices on average had returned to their long-run pre-bubble normal levels (after adjusting for inflation; see figure below). In essence the Fed thinks it knows best about the “correct” prices for homes and is trying to improve on the market. This is a dangerous bubble-rebuilding strategy.

The Fed’s intervention in the allocation of credit by buying something other than government bonds was to be undertaken only under “emergency” conditions. Apparently, someone declared an emergency without notifying anyone. What’s next for the Fed? California’s municipal bonds? Shares of GM? Hey wait a minute, I’ve got some swampland in Florida for sale!

housing prices

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January 2013