Archive for January 2008
In this fun thread, on July 4, 2007, I wrote about one of Bernanke’s speeches:
This latest wind bag empty rant of his is almost laughable
The Financial Accelerator and the Credit Channel
June 15, 2007
He speaks of his model results as if they represent reality without question. It is notable that he only references papers that support his arguments without a nod to the opposing viewpoint. The more I read this guy’s stuff, the more upsetting it gets. I may have only been thinking about credit markets for the past two years, but I’ve been a researcher for a lot longer than that and I’ve developed a nose for BS and Bernanke’s articles reek of it.
Then, in response to doctorwes’ comment, I said (emphasis added in bold):
For example, he suggests that if many homeowners have little equity in their homes, and there is a decline in home prices, there might be a more negative impact on the economy than people would otherwise expect.
More than who expected? Sounds like a lame excuse to me. The proponents of the BIS view certainly saw it coming and several NBER papers are there (including Scwartz’) to prove it, which he conveniently chose to disregard. Sorry, you can’t take one side of a debate and when it turns out you’re wrong, claim to be ignorant of the other side.
In addition to my apocalyptic predictions, I also predict that Bernanke will be removed from his post in the not-so-distant future (say post Nov ’08 ).
We’ll see if he lasts until after the elections. I doubt it.
Financial Armageddon points to the Reuters article:
where he argues that deflation is the next big worry. I have to humbly disagree. Sort of.
I do agree that financial asset prices are due for a massive correction, but the economy is made of more than just financial assets. Financial assets will see deflation, but physical assets will see inflation.
During the “New Economy”, financial assets have soared in value and I believe, like Jeremy Grantham, that financial assets throughout the globe have experienced a bubble.
Like I’ve said in a comment or two on Panzner’s blog, during past corrections in the financial sector, China and India were absorbing inflationary pressures. That structural shift is what will make this time different. Today, China and India are net exporters of inflation and loose monetary policy in the US will create domestic inflationary pressures that have no where to go this time.
This is the rift I saw between physical and financial assets when David Richards asked me what I thought about the markets back in December of 2006. That rift has been partially corrected with the rise in commodity and energy prices since then, but I think there is a long way to go before things are neutral. As usual, things usually will not reach a nice equilibrium and stay there. Inertia will carry it through neutral and beyond. Significantly beyond.
Wow. When I first began voicing my opinion about the Fed and monetary policy in a public phorum, it didn’t take long for me to be drawn to some papers by Anna Schwartz. On July 3, 2007, when I was asked what I would have done if I was in charge of monetary policy, I said:
If I were in charge from 2000-2007, I probably would have surrounded myself by smart people like Anna Schwartz, who wrote this gem (in 2002)
It is crucial that central banks and regulatory authorities be aware of effects of asset price inflation on the stability of the financial system. Lending activity based on asset collateral during the boom is hazardous to the health of lenders when the boom collapses. One way that authorities can curb the distortion of lenders’ portfolios during asset price booms is to have in place capital requirements that increase with the growth of credit extensions collateralized by assets whose prices have escalated. If financial institutions avoid this pitfall, their soundness will not be impaired when assets backing loans fall in value. Rather than trying to gauge the effects of asset prices on core inflation, central banks may be better advised to be alert to the weakening of financial balance sheets in the aftermath of a fall in value of asset collateral backing loans.
Now, she takes both Greenspan and Bernanke to task in this scorching article at the Telegraph:
Anna Schwartz blames Fed for sub-prime crisis
The high priestess of US monetarism – a revered figure at the Fed – says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. “The new group at the Fed is not equal to the problem that faces it,” she says, daring to utter a thought that fellow critics mostly utter sotto voce.
“They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence,” she told The Sunday Telegraph. “There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for,” she says.
That is a great article and although I should probably be a little more dignified that proclaiming “Bernanke sucks”, it is good to know that Anna Schwartz is also not a particularly big fan of those at the Fed right now.