Dean Baker, of the Center For Economic And Policy Research, correctly identified the US housing bubble in August 2002, four years before it peaked.
In a current article he points out ‘What Greenspan should have done‘ [aljazeera.com 11 Jan 2012].
Excerpts:
“In Washington policy circles, money and influence can be used to make even the most simple and obvious things complicated and confused. This is certainly the case with the housing bubble and its aftermath. Four years into the housing bubble downturn, much of the country remains hopelessly confused about what happened, why it happened and who is to blame.
First, what happened is very straightforward: we had a huge run-up in house prices that had no basis in the fundamentals of the housing market. After 100 years in which nationwide house prices just kept even with the overall rate of inflation, house prices began to sharply outpace inflation, beginning in the late 1990s.
By 2002, when some of us first noticed the bubble, house prices had already risen by more than 30 per cent in excess of inflation. By the peak of the bubble in 2006, the increase in house prices was more than 70 per cent above the rate of inflation.”
…
“..some quick points on what could have been done. First, the Fed has responsibility for maintaining the stability of the US economy. Alan Greenspan should have recognised the bubble and done everything in his power to burst it before it grew to such dangerous levels.
Step one in this process should have been to document its existence and show the harm that its collapse would bring. This means using the Fed’s huge staff of economists to gather the overwhelming evidence of a bubble and to shoot down anyone who tried to argue otherwise. Greenspan should have used his Congressional testimony and other public appearances to call attention to the bubble.
This would have put the bubble clearly on everyone’s radar screen. And, the reality was that there were no serious counter-arguments. It is difficult to believe that this action by itself would not have slowed the home buying frenzy and curbed the issuance of junk loans, or at least their repurchase for securitisation.
Second, the Fed has enormous regulatory power beginning with setting guidelines for issuing mortgages. They first issued draft guidelines in December of 2007. It was not hard to find abusive and outright fraudulent practices in the mortgage industry, if anyone in a position of authority was looking for it.
Finally, the Fed could have used interest rate increases as a mechanism to rein in the bubble. This should have been a last resort, since higher rates would have slowed the economy at a time when it was still recovering from the collapse of the stock market bubble.
To maximise the impact of any rate increases, Greenspan could have announced that he was targeting the housing market. He could have said that he would continue to raise rates until house prices were brought back to a more normal level.”
In the case of Canada’s RE bubble, it’s too late for Mr Carney to do the right thing. The implosion quite likely has already begun of its own accord.
Of interest, here is what Dean Baker has said of the Canadian RE market: “It looks to me like you have some real problems. Canada could see house prices collapse by 25 to 30 per cent if interest rates rise by about two percentage points.” [Nov 2010]
On a related note, for those who can stomach it, take a look at this G&M article [12 Jan 2012] ‘Bernanke saw ‘relatively soft landing’ in housing in 2006′, featuring excerpts from Federal Reserve meeting transcripts from 2006. These guys seem almost completely unaware of the dangers that had been foreseen and written about by many others, so, I suppose, you could argue you couldn’t really expect them to move to clampdown on something that they didn’t think existed. – vreaa
Now the question is what will the Bank of Canada and the Canadian federal government do? Mortgage rates are going down not up. In the words of Ned Flanders, that’s one dilly of a pickle!
Bank of Canada might raise interest rates above 1.00% sometime this century. They complain that people aren’t saving and debt is increasing. Wonder why! And they ask people to please be more prudent? How about raise rates, fools, that is the tool you have at your disposal, not parental lectures. And of course this props up the housing bubble. Announced today at cbc.ca:
“BMO announced Thursday it was slashing the rate by a half a percentage point, a move expected to boost competition among the big banks vying for real estate customers”
Raise interest rates already.
Wrong quote. This is the one:
“The Bank of Montreal moved its benchmark five-year fixed mortgage rate to 2.99 per cent late Thursday — the lowest posted rate from a major bank in Canadian history.”
the pb begins with the very existence of a public backstop for select private enterprise. if you accept that, the rest is a discussion on different degrees of bad. what they SHOULD do is close up shop. that would solve a lot of problems in a hurry.
But it is soooo much easier to pretend that a bubble does not exist, right ?
Get central banks out of the risk pricing business and remove taxpayer funded backstops (CMHC). The world is awash in debt and on a completely unsustainable economic trajectory as a result of too much government interference in the markets, not too little.
“The state should confine itself to establishing rules applying to general types of situations and should allow the individuals freedom in everything which depends on the circumstances of time and place, because only the individuals concerned in each instance can fully know these circumstances and adapt their actions to them. If the individuals are able to use their knowledge effectively in making plans, they must be able to predict actions of the state which may affect these plans. But if the actions of the state are to be predictable, they must be determined by rules fixed independently of the concrete circumstances which can be neither foreseen nor taken into account beforehand; and the particular effects of such actions will be unpredictable. If, on the other hand, the state were to direct the individual’s actions so as the achieve particular ends, its actions would have to be decided on the basis of the full circumstances of the moment and would therefore be unpredictable. Hence the familiar fact that the more the state “plans”, the more difficult planning becomes for the individual.”
― Friedrich A. von Hayek, The Road to Serfdom
add. few understand/appreciate the CB itself is backstop to banks conjuring credit from thin air (fraud). without CB guarantee, cannot have widespread acceptance of bank credit notes, cannot propagate unbacked credit creation. rates would reflect supply of real savings. eg. RBC only cares about its stress tests to the extent it has to endure public outlash over potential bailout. true fcn of BOC is to save their ass and facilitate credit from thin air issuance. about 1/2 of wall st profits is interest on credit from thin air instruments.
I love how the Bernanke article cites builders offering free cars as an indication of the troubles right in the first sentence…Just last week driving into work they were advertising some development in Surrey and how you get a brand new Honda with purchase! Can anyone remember which development this was? The ad is the one with the guy with an annoying British accent talking up Surrey as the new epicentre of urban cool.
I walked by the new luxurious development just next to the Shaw tower yesterday, Including is a Ferrari “community car”… I don’t know how much they will pay in condo fees in this building, but that expense looks totally pointless to me.
they should just rename it ‘the community hummer car’
don’t say you didn’t laugh