From the WSJ Real Estate Journal:
Official Says Bad Data Fueled
Rate Cuts, Housing Speculation
In an apparent and rare in-house critique, the president of the Federal Reserve Bank of Dallas said that because of faulty inflation data, the Fed kept interest rates too low for too long earlier this decade, fueling speculative housing activity.
A number of critics have said the Fed under former chairman Alan Greenspan kept monetary policy too easy from 2003 to 2004. But Richard Fisher’s remarks to the New York Association for Business Economics yesterday mark the first time some Fed watchers could recall a sitting Fed policy maker making such comments.
Mr. Fisher said from 2002 to early 2003, inflation, as measured by the price index of personal consumption expenditures (PCE) excluding food and energy, was running below 1%. That suggested that a serious shock to the economy could turn inflation to deflation, or generally falling prices. Deflation makes it much harder for the Fed to boost growth by engineering deeply negative real, that is inflation-adjusted, interest rates.
To reduce the risk of deflation, the Fed lowered its target for the Fed funds rate — charged on overnight loans between banks — to 1% in June 2003 and held it there until mid-2004. It has since raised it to 5.25%.
Mr. Fisher noted that subsequent revisions show PCE inflation was actually a half a percentage point higher than originally estimated. “In retrospect, the real Fed funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been,” Mr. Fisher said.
“In this case, poor data led to a policy action that amplified speculative activity in the housing and other markets. Today…the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country. It is complicating the [Fed’s] task of achieving…sustainable noninflationary growth.”
Hat Tip to Tim from The Mess that Greenspan Made for this..
http://dallasfed.org/news/speeches/fisher/2006/fs061102.cfm
“…across the country.”
Kinda goes against the “there can be no national housing bubble” hypothesis.
Rich
The question is, does a national credit market make for a national real estate market or does it simply represent a systemic factor in the performance of those markets.
jb
I have seen written on some bubble blogs that this was not a housing bubble but a lending bubble. This would seem to coroborate that thesis.
I think we do, in a sense, have a national real estate market. It’s no coincidence that real estate went up all across the country (or the world for that matter). I think a national credit market driven by cheap money allowed this to happen, but didn’t cause it. I think it has more to do with access to information. As Shiller describes in “Irrational Exuberance”, manias are contagious and self-reinforcing. As one market goes up, other markets take notice and ask, “why not here”? The more the bubble expands, the more the media reports on it, the more people take notice and want a piece of the action. In fact, the first bubbles seemed to coincide with the start of the newspaper.
If we had the same cheap money/ easy credit conditions, but didn’t have easy access to information, I doubt if all of these bubbles across the country would have coincidentally emerged on their own.
That being said, I put the blame squarely on the Fed. They provided the fuel for the fire and they alone could have taken I away before it got out of had. I also give Fisher credit for taking responsibility.
“Mr. Fisher noted that subsequent revisions show PCE inflation was actually a half a percentage point higher than originally estimated.”
We buy this crap??? Sound like CYA to me. All of a sudden a revision indicates we underestimated inflation in 2003-04?? Total BS from the fed. Will we hear in the near future that we printed way too much money??? Mysteriously, we’ll discover that there is an exhorbitant amount of dollars floating around the world. Will we then hear them blame it on the fact that M3 is no longer reported and nobody really knew?? Total nonsense.
It’s obvious that the fed played a huge part in the bubble, but I don’t think the entire thing can be laid at its feet. Dropping rates expanded the pool of people who thought they might be able to pull of a flip, it certainly helped get sellers asking price and above, because borrowing costs were so low, but the fed did not eviscerate the standards for lending that got the weakest players into the market, the lenders did that.
RE Post 3 from JB:
While I don’t think we have a national real estate market, we certainly can (and do) have a national real estate bubble. A national market is in no way a prerequisite for a national bubble. Prices in Texas don’t even effect prices in Arkansas, let alone NJ. I believe this was part of Greenspan’s sophistry. If people start the discussion from the point of a national market, they might not ever get around to trying to define national bubble.
My own definition would be something like: When more than half the population lives in an area where there is a bubble, the bubble is national in scope.
Prices in diff’t areas will influence each other due to a mobile population and the arbitrage potential of moving to a cheaper area. Article in the WSJ today on how Houston RE is still going up in part because it is so much cheaper than most other major cities.
Alan Greenspan will go down in history as the anti-Volcker. He undid the stability that Volcker brought via severe pain (high interest rates) to a whacked up financial system that was dealing with the after-effects of the Dollar-Gold decoupling. Although, in all fairness, Greenspan is not alone to blame for this. He was egged on by the last two Administrations. Our politicians have definitely to blame for covering up the publics eyes with rose-tinted glasses. Clinton found a way out of the deep early 90s recession by endorsing an explosion in the M3. Dubya did the same + combined it with historically absurd rates of 1% to dig himself out of a recession + post911 effects. Now the Fed is stuck with the job of cleaning the mess. No one knows what will happen next….
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