Bernanke: There's No Housing Bubble to Go Bust (2005)

http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR2005102602255.html

by jwallaceparker • 13 years ago

32 33 13 years ago

ignostic• 13 years ago

Nice find, and not just for the obviously wrong side of it. I've heard it argued that the housing bubble was somehow "unforeseeable" and that "no one saw it coming."

>"Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn"

grbalaffa• 13 years ago

> I've heard it argued that the housing bubble was somehow "unforeseeable" and that "no one saw it coming."

I've heard this from various corners as well, and it utterly amazes me that there are people who would actually try to claim that with a straight face. There certainly was plenty of warning of the housing bubble both in the mainstream press and elsewhere. Here are just a couple of examples:

The Economist called it "the biggest bubble in history" in 2005:

http://www.economist.com/node/4079027

And here is a blog which goes back to 2004 dedicated to discussing the housing bubble:

  http://thehousingbubble.blogspot.com  (original site)
  http://thehousingbubbleblog.com       (post-move site)

Also, Wikipedia does a pretty good job of collecting the history of various warnings and indications here:

http://en.wikipedia.org/wiki/United_States_housing_bubble#Id...

In short, it's quite obvious that plenty of people "saw it coming", and anyone trying to claim otherwise is just desperately playing the CYA game.

pessimizer• 13 years ago

Thanks for the Wikipedia link - never knew a list that detailed of the public predictors existed. Will send it as a reference instead of trying to remember names that the person I'm arguing with doesn't even recognize. Love that Dean Baker ( http://www.cepr.net/index.php/beat-the-press/ )is in the power position.

hkmurakami2• 13 years ago

(I know that what I'm writing here is ludicrous but...)

I wonder if a fed chairman who does foresee financial bubbles collapsing would actually be able to say so publicly. The fed is supposed to be immune from lobbying and political forces in theory, but I wonder what the chances are for someone to bow to the social pressures and pretend like everything is just toally fine.

In fact, how long has it been since we've had a high ranking federal reserve official actually forecast economic doom? I'm not saying that such officers will never say something negative when the public signals are all green lights, but I can't help but think that there is some skew towards optimism in public comments.

wintersFright2• 13 years ago

"When it becomes serious, you have to lie" - Jean-Claude Juncker, Luxembourg PM and Head Euro-Zone Finance Minister

http://blogs.telegraph.co.uk/news/davidhughes/100087136/he-m...

hkmurakami2• 13 years ago

Thanks for the link! This line was hilarious:

Hilariously, Schuller went on to say that being caught out lying in this way would not undermine the market’s confidence in future eurozone pronouncements – because it already had no confidence.

btilly• 13 years ago

Anyone who has been anywhere close to finance knows that this is true.

The economy is largely about psychology and perception. If someone in a position of authority stands up and says that the sky is falling, they can cause the sky to fall even if it wasn't about to.

It is the same problem as the classic run on the banks. Even a fundamentally healthy bank is going to be in trouble if everyone asks for their money back at once.

marcamillion3• 13 years ago

Well...I mean....can you blame him?

In an economy where perception is reality - if the central bankers and main regulators start screaming that the house is going to burn down...guess what happens....exactly.

So if they think the house may burn down....they have no choice but to lie to stave it off as long as possible.

k2enemy• 13 years ago

I think you're exactly right, but it is more than political/lobbyist/social pressure. Even if the fed knew there was a bubble, announcing so would coordinate everyone's actions and we would have a crash for sure. If they announce that there is no bubble, then they have some time to try to manage the situation (which clearly didn't work in the housing crash).

More generally, public statements are an important policy instrument for the fed. A lot of macroeconomic research in the last 30 odd years has focused on the importance of people's expectations about the future and how traditional monetary and fiscal policies work once you take into account how they affect people's expectations. For example, the government giving everyone $1,000 may not increase spending today if people expect that this government expenditure will lead to higher taxes tomorrow.

So the fed has to take care and think about how what they say and do will affect people's expectations. As another example, right now we're in a situation where it is hard to the fed to lower interest rates because they are already basically at zero. One thing that they could do is say and do things to make people believe that we will have higher inflation in the future. This should spur companies to make investments today rather than hold onto their cash.

This isn't to say that the fed can say anything and people will believe it. What the fed says has to be credible. There is a lot of interesting research that looks into this issue and shows what it means for the kinds of policies the fed can or should adopt. The 2004 nobel was awarded in this area -- the nobel page has a lot of good information: http://www.nobelprize.org/nobel_prizes/economics/laureates/2...

waps• 13 years ago

The problem is that this is capitalism, or perhaps better expressed : an auction. There is a bubble if and only if most people believe there is a bubble. There is no bubble if most people don't believe there is one.

Right now I'd say there definitely isn't one and house prices will rise for a while, even if prices are really at bubble levels. However, the economy is not doing well, so people will notice they can't actually buy "non-"bubble priced houses, and Bernanke can only hold back public opinion for so long.

nkoren• 13 years ago

Bernanke was delusional, but others saw the bubble for what it was. Four months months earlier, in The Economist: "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops. [...] According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history."[1]

There's been a narrative developing lately that none of the mainstream economists saw the crash coming. This is not true; plenty of them did. But their message did not appeal to incumbent politicians, and so it was ignored.

1: http://www.economist.com/node/4079027?story_id=4079027

mistermann• 13 years ago

Tons of bloggers were all over it as well, just one example:

http://housingpanic.blogspot.com

don_draper3• 13 years ago

Also, http://thehousingbubbleblog.com

liber8• 13 years ago

It's very easy to say these people were right, in hindsight. There's many from the austrian school who had been calling for the 2008 recession for 10 years. So, they were right, but it's pretty hard to listen to them when things keep chugging along for so many years.

Likewise, there were many people who saw the 2008 pop coming and bet on it, but just mistimed it by a few months. The handful of Wall Street guys who timed it just right made their careers and look like geniuses, but there were numerous times that many people who took massive hits because they were just a few months too early.

The point is, the doomsday message is never going to appeal to incumbents, because it's pretty hard to know where you are in the bubble. If you're only in the middle and you start jacking interest rates up (prolonging the bubble but not popping it), its very likely that it will look like you made the wrong move (after all, prices kept going up the whole time, regardless of the rate increases, so maybe it wasn't a bubble?) Greenspan was a genius ... until 2.5 years after he stepped down. Now he gets a large part of the blame for causing the bubble.

We're in another real estate bubble right now. Guaranteed. My so-cal house is up over 20% just in the last year (after only falling about 20% from its 2008 peak), and things are only accelerating in my area. But real estate is basically the only thing driving the economy, so there's no way they're lowering rates in the next two years, so there's no way prices are falling. Asset prices overall are going to skyrocket over the next few years, and then will crash again, probably close to as hard as in 2008. But whether that crash is 3 years out, 5 years out, or 10 years out, I have no idea. Nobody does. So if you're a politician, the safest bet is to ride the wave and just hope you don't get smashed into the rocks.

marcamillion3• 13 years ago

Wow...how prescient.

>Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.

The only economy that never suffered as badly as everybody else in that list is Australia - and MAYBE New Zealand - largely because of the ridiculous demand of commodities from China, et. al.

But these guys were spot on.

No wonder I can't stop reading them every week.

don_draper3• 13 years ago

Search Youtube for 'Peter Schiff was right'. It's entertaining to watch the people who laughed at him in 2006.

Steko4• 13 years ago

It's even more entertaining to laugh at him over his calls for hyperinflation from 2009:

http://krugman.blogs.nytimes.com/2011/12/15/inflation-predic...

PAYNE: So, where are you then, Peter, with respect to inflation? Do you think this is going to be the big story of 2010?

SCHIFF: You know, look, I know inflation is going to get worse in 2010. Whether it’s going to run out of control or it’s going to take until 2011 or 2012, but I know we’re going to have a major currency crisis coming soon. It’s going to dwarf the financial crisis and it’s going to send consumer prices absolutely ballistic, as well as interest rates and unemployment.

PAYNE: And what does that mean? For people watching this show, what does that mean for the average American?

SCHIFF: It means their life is going to get a lot more difficult. It means things that they need to buy, things like food and energy, are going to be much more expensive. Ultimately, interest rates are going to rise and their entire standard of living is going to plunge.

And I’m hoping the government doesn’t respond to this inflation with price controls because that’s going to make it even worse. Now, you’re going to be waiting in long lines to get basic food items or to get energy because there’s going to be shortages. People might be going to the black market.

PAYNE: You’re talking you’re talking Zimbabwe, Weimar, Germany — I mean, you’re really talking about something like that actually happening in this country.

SCHIFF: It will happen if we don’t change policies. There is still time to change.

PAYNE: Right.

SCHIFF: I mean, I’m running for the United States Senate, so I can try to change that myself. But if we don’t reverse course, if we continue to stimulate, then we will end up with hyperinflation and it will be like Zimbabwe.

marcamillion3• 13 years ago

Exactly. Maybe Bernanke never got the memo - with their recent concerns about the current tools they use to read inflation, the major concern that it is even lower than is being reported - I would say that this call has been wrong.

temphn• 13 years ago

Go long on the dollar, we'll go long on Bitcoin and gold. Let's see where you are in a few years when QE-infinity keeps on going.

lake99• 13 years ago

Schiff can be funny at times. I like Krugman though. Krugman is way funnier.

http://www.youtube.com/watch?v=CgAUW_zcN9k

don_draper3• 13 years ago

Will you remember to come back here within 5 years and revisit your mocking of Peter Schiff?

The Fed is printing lots of money. (And so is China and Europe)

The money supply is growing much faster than usual.

That can lead to hyper-inflation.

Would I talk with his style and confidence? No. Should you flat out ignore what he says? No

teeja• 13 years ago

Either he's a complete fool, or he hadn't heard about the massive RE fraud the FBI had begun reporting taking place all over the country, or he knew damn well what and why.

Take your choice. Small wonder that prices were rising like crazy (how can that -not-be a bubble? given the history of RE prices over the previous century) when anyone with a pulse could get a loan. And oh how they got away with it.

tdees40• 13 years ago

There were people who saw it, sure, but lots more people who didn't. So saying he was a complete fool is just ridiculous.

anon987• 13 years ago

You know where I go for my armchair macro-economic analysis? Hacker News.

Flagged.

coolsunglasses• 13 years ago

Good way to lose the ability to flag things.

Steko4• 13 years ago

Why is that? 2005 article submitted with a clear political motive from a submitter who has a history of similar[1]. I rarely use the flag button and often complain about the flagging rings here but this one didn't seem like a bad one to flag.

[1] off the first page (2nd page mostly dead links, idk what that's about):

What’s Behind the Crash in the Gold Market? (time.com)

No Housing Bubble Trouble (2005) (cato.org)

Gold prices dive 5% to $1,487 an ounce (usatoday.com)

RonPaulCurriculum.com (ronpaulcurriculum.com)

Texas wants its gold stored in the state, not at Federal Reserve in New York (bostonglobe.com)

Petition: Pass a global wealth cap of $1 billion per US citizen (change.org)

Elizabeth Warren's Unwarranted Wage (mises.org)

rafski• 13 years ago

"Never believe anything until it has been officially denied."

Otto von Bismarck

(also attributed to others as is every good quote)

Bernanke: There's No Housing Bubble to Go Bust (2005)

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