Housing.com News, Analysis & Opinion: Your New Fed Chairman Is....Ben Bernanke

So what makes Bernanke a significant choice to head the Fed? Have a look at this speech he gave to the Federal Reserve Board in April. There's a lot of dry financial jargon and boring legalese to sift through, so I'll quote a few of his salient points:

The weakening of new capital investment after the drop in equity prices did not much change the net effect of the global saving glut on the U.S. current account. The transmission mechanism changed, however, as low real interest rates rather than high stock prices became a principal cause of lower U.S. saving. In particular, during the past few years, the key asset-price effects of the global saving glut appear to have occurred in the market for residential investment, as low mortgage rates have supported record levels of home construction and strong gains in housing prices. Indeed, increases in home values, together with a stock-market recovery that began in 2003, have recently returned the wealth-to-income ratio of U.S. households to 5.4, not far from its peak value of 6.2 in 1999 and above its long-run (1960-2003) average of 4.8. The expansion of U.S. housing wealth, much of it easily accessible to households through cash-out refinancing and home equity lines of credit, has kept the U.S. national saving rate low--and indeed, together with the significant worsening of the federal budget outlook, helped to drive it lower. As U.S. business investment has recently begun a cyclical recovery while residential investment has remained strong, the domestic saving shortfall has continued to widen, implying a rise in the current account deficit and increasing dependence of the United States on capital inflows.

So he flat-out admits that it was the boom in construction, coupled with low interest rates and "creative mortgages" that spurred Americans to spend, spend, spend. So far, so good.

Basic economic logic thus suggests that, in the longer term, the industrial countries as a group should be running current account surpluses and lending on net to the developing world, not the other way around. If financial capital were to flow in this "natural" direction, savers in the industrial countries would potentially earn higher returns and enjoy increased diversification, and borrowers in the developing world would have the funds to make the capital investments needed to promote growth and higher living standards. Of course, to ensure that capital flows to developing countries yield these benefits, the developing countries would need to make further progress toward improving conditions for investment, as I will discuss further in a bit.

This sounds a hell of a lot like John Snow's recent plea to China to spend more, save less, and use plastic. Note also the barely constrained air of superiority--"How DARE these second-rate nations be lending US money?"

Because investment by businesses in equipment and structures has been relatively low in recent years (for cyclical and other reasons) and because the tax and financial systems in the United States and many other countries are designed to promote homeownership, much of the recent capital inflow into the developed world has shown up in higher rates of home construction and in higher home prices. Higher home prices in turn have encouraged households to increase their consumption. Of course, increased rates of homeownership and household consumption are both good things. However, in the long run, productivity gains are more likely to be driven by nonresidential investment, such as business purchases of new machines. The greater the extent to which capital inflows act to augment residential construction and especially current consumption spending, the greater the future economic burden of repaying the foreign debt is likely to be. (Emphases added)

In other words, outsourcing has driven our manufacturing base into the toilet, and housing is all that's propping us up. The solution, of course, is to put other nations in debt to us so we can keep our housing boom going and not have to worry about it. :)

All the above was from Dr. Bernanke's testimony before the Joint Economic Committee last Thursday.

Speaking of Brad DeLong, check out this commentary on Bernanke's "glut theory." Doesn't hold up a particularly great amount of water with a concentrated analysis, I think.

All of this is going to be important to you, the homeowner or homebuyer, because the Fed under Greenspan cut interest rates to sell Bush's corporate tax cuts and fuel the housing boom. Now that the markets are dividing and major housing hubs are slowing down, interest rates are going up, and stagflation may be upon us, how Bernanke decides to address these problems will be absolutely crucial to the market's future for the next few years or so.

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AP via Yahoo has the story, while CNN Money reminds us why we should care. So what makes Bernanke a significant choice to head the Fed? Have a look at this speech he gave to the Federal Reserve Board in April. There's a lot of dry financial jargon and boring legalese to sift through, so I'll quote a few of his salient points: The weakening of new capital investment after the drop in equity prices did not much change the net effect of the global saving glut on the U.S. current account. The transmission mechanism changed, however, as low real interest rates rather than high stock prices became a principal cause of lower U.S. saving. In particular, during the past few years, the key asset-price effects of the global saving glut appear to have occurred in the market for residential investment, as low mortgage rates have supported record levels of home construction and strong gains in housing prices. Indeed, increases in home values, together with a stock-market recovery that began in 2003, have recently returned the wealth-to-income ratio of U.S. households to 5.4, not far from its peak value of 6.2 in 1999 and above its long-run (1960-2003) average of 4.8. The expansion of U.S. housing wealth, much of it easily accessible to households through cash-out refinancing and home equity lines of credit, has kept the U.S. national saving rate low--and indeed, together with the significant worsening of the federal budget outlook, helped to drive it lower. As U.S. business investment has recently begun a cyclical recovery while residential investment has remained strong, the domestic saving shortfall has continued to widen, implying a rise in the current account deficit and increasing dependence of the United States on capital inflows. So he flat-out admits that it was the boom in construction, coupled with low interest rates and "creative mortgages" that spurred Americans to spend, spend, spend. So far, so good. Basic economic logic thus suggests that, in the longer term, the industrial countries as a group should be running current account surpluses and lending on net to the developing world, not the other way around. If financial capital were to flow in this "natural" direction, savers in the industrial countries would potentially earn higher returns and enjoy increased diversification, and borrowers in the developing world would have the funds to make the capital investments needed to promote growth and higher living standards. Of course, to ensure that capital flows to developing countries yield these benefits, the developing countries would need to make further progress toward improving conditions for investment, as I will discuss further in a bit. This sounds a hell of a lot like John Snow's recent plea to China to spend more, save less, and use plastic. Note also the barely constrained air of superiority--"How DARE these second-rate nations be lending US money?" Because investment by businesses in equipment and structures has been relatively low in recent years (for cyclical and other reasons) and because the tax and financial systems in the United States and many other countries are designed to promote homeownership, much of the recent capital inflow into the developed world has shown up in higher rates of home construction and in higher home prices. Higher home prices in turn have encouraged households to increase their consumption. Of course, increased rates of homeownership and household consumption are both good things. However, in the long run, productivity gains are more likely to be driven by nonresidential investment, such as business purchases of new machines. The greater the extent to which capital inflows act to augment residential construction and especially current consumption spending, the greater the future economic burden of repaying the foreign debt is likely to be. (Emphases added) In other words, outsourcing has driven our manufacturing base into the toilet, and housing is all that's propping us up. The solution, of course, is to put other nations in debt to us so we can keep our housing boom going and not have to worry about it. :) As my Yiddish-speaking dad would say, this is "bubbemeiser." Brad DeLong's talkbacks have some zinger comments about Bernanke, particularly these: Here is Dr. Bernanke waving off any possibility of a housing price bubble: "Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas." Then again, we have such big deficits because our economy is so terrific: "While the current-account imbalance partly reflects the strong growth of the U.S. economy and its attractiveness to foreign investors, low U.S. national saving also contributes to the deficit." All the above was from Dr. Bernanke's testimony before the Joint Economic Committee last Thursday. What's that the kids say? "OWNED!" Speaking of Brad DeLong, check out this commentary on Bernanke's "glut theory." Doesn't hold up a particularly great amount of water with a concentrated analysis, I think. All of this is going to be important to you, the homeowner or homebuyer, because the Fed under Greenspan cut interest rates to sell Bush's corporate tax cuts and fuel the housing boom. Now that the markets are dividing and major housing hubs are slowing down, interest rates are going up, and stagflation may be upon us, how Bernanke decides to address these problems will be absolutely crucial to the market's future for the next few years or so. Tinfoil hats, phasers, and snark at the ready!