"A number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida . . . Entire condo projects and upscale residential lots are being pre-sold before any construction, with buyers freely admitting that they have no intention of occupying the units or building on the land but rather are counting on "?flipping' the properties "” selling them quickly at higher prices."
-Jack Guynn, then president of the Federal Reserve Bank of Atlanta
"I don't want to leave the impression that we think there's a huge housing bubble. We believe a lot of the rise in house prices is rooted in fundamentals.”
-Stephen D. Oliner, Fed researcher
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For the longest time, I was astonished at what looked like gross incompetence and utter lack of comprehension at the US Federal Reserve. I previously found it mind boggling.
I no longer get upset over this, as I have discovered the fundamental flaw of the Federal Reserve errors. Wore than easy money, worse than Greenspan’s “flawed” ideology, is a simple error that the Fed keeps making.
Math.
The Fed seems to be somewhat ignorant of basic mathematics. As far as I can tell, they are unfamiliar with standard deviations. They don’t grok mean reversion. Change in delta, 2nd derivatives seemingly perplex them. Even mortgage amortization tables appear beyond their ken.
How else could you explain the recently released transcripts that show the Fed rationalizing away the burgeoning what their ultra-low rates had done? How on earth could a Fed researcher claim “the rise in house prices is rooted in fundamentals” ?
The Fed completely missed the credit bubble, and seemingly ignored the nascent Housing boom in 2004.
Greenspan continually insisted that not only could the Fed not identify a bubble in real time, but could not possibly pop it. Its cheaper to clean up afterwards the Maestro said.
The only explanation that makes any sense to me is that they are innumerate — the mathematical equivaency of illiteracy. All it required to identify any of these — as we, and plenty of others did — was to look at the prior history and compare metrics:
"¢ Median Federal Overnight Rates (20th Century)
"¢ Total Credit and Mortgage Available
"¢ Median Home price to Median Income
"¢ Rental versus ownership costs
Any one of these would have clued the Fed into something aberrational occurring. And yet they managed to miss this completely.
From now on, I will cease calling the Fed incompetent, and begin using the more accurate phrase “innumerate.”
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Previously: Bernanke Still Does Not Understand Credit Crisis (January 4th, 2010) http://www.ritholtz.com/blog/2010/01/bernanke-cause-of-credit-crisis/
Fed Transcripts Stoke Debate on Rates SEWELL CHAN NY, May 3, 2010 http://www.nytimes.com/2010/05/04/business/04fed.html
Fed's Guynn Warned in 2004 Low Rates May Fuel Price Surge Joshua Zumbrun Bloomberg, May 1 2010 http://www.bloomberg.com/apps/news?pid=20601087&sid=asN.6J4RCnOo&
BR,
as you know, with the following, adjust as necessary..
sainttjames Says:
May 4th, 2010 at 8:22 am >>>Bernanke Still Does Not Understand Credit Crisis (January 4th, 2010)
HAHAHAHAHA!
I respectfully disagree"¦he understands it quite well"¦but his goal is not your goal. http://www.ritholtz.com/blog/2010/05/attention-ben/#comment-290807 ~~ or, differently, the old saw: “Other than that, Mrs. Lincoln…”
Why don’t you take the next step:
You can get a meeting with your congressperson or senator. get someone interested in pushing your ideas. All it takes is a little courage – OK, you may not find courage in politicians, but you can try.
BR, ECRI came up with their economy outlook. Last time, they were spot on their prediction on strong numbers.
Barry, I think you are being a little too hard on them. We all like to call them eeeediots in retrospect and talk about how we could do the job–me included–but bubbles really aren’t that easy to call in real time. I am in the camp of people who was talking about the housing bubble in 2006, when I was a wee-bit undergrad and my girlfriend’s mother tore me a new one for “talking nonsense” (Hamptoms real-estate broker). I saw it, it perplexed me. As a young teen in 1999 I remember asking my dad how Amazon.com could possibly be worth more than the entire bourse of a medium-sized country (he agreed with me said something about staying long and stop-loss something and I went back to “coding” HTML). But not all of them are this easy to see. Take the Chinese property bubble, for example. While Xie and the MSM keep talking about this real-estate bubble, there is some doubt about it. (http://blog.morallybankrupt.org/2010/05/possibility-of-chinese-propety-bubble.html)
We shouldn’t saddle the Fed with this. Somethings are easy to see, but some aren’t. What if the Fed tries to pop a bubble that actually isn’t because a fast, credit-fueled rise in asset prices and ends up putting the breaks on some new high-growth revolutionary development that needs that euphoric atmosphere to generate excitement and build momentum. Think of biotech for example. Yeah, a lot of companies might end up being total losses, but the homeruns could be huge. The skew is not necessarily a bad thing, IMHO.
@X: Perhaps, but THIS last one and the one before it were both NO-BRAINERS.
What else can we expect with zirp or zirp bound environments? Am I missing something?
“Mathematicians "“ Not Economists "“ Should Run the Fed” _____________
It would never work "” mathematicians are bound by, and confined to, actual numbers and their relationships to one another. Economists make shit up.
The answer can be found in the show NOVA, titled “Mind Over Money” it appeared on PBS last week
When you wrote the sentence “Math.”, I thought it said “Meth.” So I thought, “Yeah, that would explain it.”
The math thing has been pervasive for a long time! It seems that there is not a single person in all of main stream media that remember their 4th grade math. No comprehension that housing numbers with a 30% margin of error are essentially a worthless statistic.
These snapshot loss analyses that they create. Losses from the volcano are just one small example. They simply added up the revenues from all the cancelled flights. This is not an even skin deep analysis. It does not take into account that revenues and profits for all alternative forms of transportation were skyrocketing! Trains, trucks, boats etc. Not only were they increasing traffic but increasing fares! Same is true for the airlines as soon as they get back flying. Ergo, the subsequent higher fares and fuller flights is clearly going to mitigate some of their losses. This is just the skin deep stuff?
What other related industries will see gains. What about the airplane engine parts makers? The mechanics that must replace all those parts. What about insurance coverage for losses. etc etc.
The real issue and it has been pervasive for a long time is that there are no checks and balances. Anyone who has the knowledge to call out the gross inaccuracies gets squashed. There is no danger in using bad math. Anyone who disagrees with you is very unlikely to find themselves getting any media attention worth a darn.
Actually “hard” sciences, like mathematics, are the easy, i.e., rational ones. Cause and effect relationships aren’t so hard to glean. “Soft” sciences like economics, sociology, etc., are the hard ones. I’d rather there be wisdom, rather than just knowledge, when it comes to the management of the medium of exchange and store of value and unit of account (i.e., the money) for a society of 300 million plus conducting literally trillions of transactions a day. No mathematician could confidently model it.
That said, a fucking monkey could have seen there was an unusual and historically aberrational increase in housing prices from about 2001 until they peaked in 2006, which roughly coincided with an unusual and historically aberrational increase in commodities prices, from about 2003 until 2008. Self-same monkey, setting the prices of money, could have easily seen that there wasn’t anything historically “fundamental” about these price increases, that in fact, it was the money itself causing these historical aberrations, which were positively correlated with the historically aberrant low price he was charging for the money. A wise monkey could then have easily design an algorithm to keep long interest rates at their historical average of roughly 2.75% above inflation, realizing that all the efforts of his human predecessors trying to tweak and fine-tune a megalith like the US economy is futile, except in its harmfulness. Then he could go back to his relatively fruitful efforts of attempting, with his clan, to type the entire works of shakespear by random manipulations of a keyboard.
What do you want from a culture and country that thinks if it just thinks “positively” enough, it can will things to happen, make their “own reality”, if you will.
@Curm: Perhaps we should put a monkey in charge of the Fed?
@Manny:
Of course, or a well-trained dog. Perhaps even a goat, or a herd of ‘em, to eat any excess paper that comes off the presses. The point is a) no one individual or institution could ever effectively manage the activities of 300 million people, and b) since its fruitless to try, just leave the money alone, except to adjust the supply so prices average the long-term (millenial) average of about 2.75%. But it would take a wise monkey to know what not to monkey with.
The major issue with the Fed’s errors, and those of some major financial institutions, is that economists, unlike mathematicians and scientists, tend to believe, in the models they use. I learned long ago that models are great tools but if you believe in them they can lead easily lead you down the wrong path. All models are built upon assumptions, and when those assumptions are invalid the models are prone to huge error. This was one of the issues that the major credit rating agencies faced (and used to deceive) in their assessments of junk debt.
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