Fed Watch: You Have Been Warned

Federal Reserve chair Ben "Is It Too Early To Quit?" Bernanke has issued a new warning that continued energy price volatility may mean another hike in the interest rate--which will, in turn, goose lenders to raise their rates. Of course, the young padawan has learned his lessons well from his master, and did not actually commit to a rate hike or deny the possibility in his testimony:

The resolution of the nation's long-run fiscal challenge will require hard choices. Fundamentally, the decision confronting the Congress and the American people is how large a share of the nation's economic resources should be devoted to federal government programs, including transfer programs like Social Security, Medicare, and Medicaid. In making that decision, the full range of benefits and costs associated with each program should be taken into account. Crucially, however, whatever size of government is chosen, tax rates will ultimately have to be set at a level sufficient to achieve a reasonable balance of spending and revenues in the long run. Members of the Congress who want to extend tax cuts and keep tax rates low must accept that low rates will be sustainable over time only if outlays can be held down sufficiently to avoid large deficits. Likewise, members who favor a more expansive role of the government must balance the benefits of government programs with the burden imposed by the additional taxes needed to pay for them, a burden that includes not only the resources transferred from the private sector but also the reductions in the efficiency and growth potential of the economy associated with higher tax rates.

Shorter Ben Bernanke: "We're pretty much screwed either way you go. Say, how soon can I apply for early retirement?"

Now, much has been made of the rebound in home sales reports from the 26th, but as the mighty Bubble Meter points out, those numbers look a lot less impressive when placed in context. But even on its face, if people are buying houses in greater numbers, it might very well be due to the extension of such astonishingly bad mortgage products as the 50-year-mortgage, or as I like to call it, "debtors' prison."

So, what is happening, you ask? Simple. Developers and lenders are doing all they can to wring every last ounce of profit from the housing market before the mass ARM resets cause foreclosures nationwide, so they are pushing their products to every last subprime or marginal borrower there is. The volatility from gas prices is going to probably push Bernanke to make as many rate increases as he needs to in order to keep inflation contained, as the guy is obssessed with proving the economy can be stimulated without resorting to New Deal-esque measures.

Tim Iacono provides snippets of an interesting discussion about what may happen if housing prices stay up forever. Chilling stuff indeed. I think what'll happen is that different regions will have such dramatic price skews that some areas will moderate, some will flatten, and some will continue to rise sky-high. Instead of a bunch of regional bubbles, we'll have regional bubbles, healthy markets, AND crashes all at once!

Fun for the whole family! :)

(Image courtesy of the very appropriate Boojum.)

Posted at April 27, 2006 02:36 PM

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Federal Reserve chair Ben "Is It Too Early To Quit?" Bernanke has issued a new warning that continued energy price volatility may mean another hike in the interest rate--which will, in turn, goose lenders to raise their rates. Of course, the young padawan has learned his lessons well from his master, and did not actually commit to a rate hike or deny the possibility in his testimony: The resolution of the nation's long-run fiscal challenge will require hard choices. Fundamentally, the decision confronting the Congress and the American people is how large a share of the nation's economic resources should be devoted to federal government programs, including transfer programs like Social Security, Medicare, and Medicaid. In making that decision, the full range of benefits and costs associated with each program should be taken into account. Crucially, however, whatever size of government is chosen, tax rates will ultimately have to be set at a level sufficient to achieve a reasonable balance of spending and revenues in the long run. Members of the Congress who want to extend tax cuts and keep tax rates low must accept that low rates will be sustainable over time only if outlays can be held down sufficiently to avoid large deficits. Likewise, members who favor a more expansive role of the government must balance the benefits of government programs with the burden imposed by the additional taxes needed to pay for them, a burden that includes not only the resources transferred from the private sector but also the reductions in the efficiency and growth potential of the economy associated with higher tax rates. Shorter Ben Bernanke: "We're pretty much screwed either way you go. Say, how soon can I apply for early retirement?" Now, much has been made of the rebound in home sales reports from the 26th, but as the mighty Bubble Meter points out, those numbers look a lot less impressive when placed in context. But even on its face, if people are buying houses in greater numbers, it might very well be due to the extension of such astonishingly bad mortgage products as the 50-year-mortgage, or as I like to call it, "debtors' prison." So, what is happening, you ask? Simple. Developers and lenders are doing all they can to wring every last ounce of profit from the housing market before the mass ARM resets cause foreclosures nationwide, so they are pushing their products to every last subprime or marginal borrower there is. The volatility from gas prices is going to probably push Bernanke to make as many rate increases as he needs to in order to keep inflation contained, as the guy is obssessed with proving the economy can be stimulated without resorting to New Deal-esque measures. Tim Iacono provides snippets of an interesting discussion about what may happen if housing prices stay up forever. Chilling stuff indeed. I think what'll happen is that different regions will have such dramatic price skews that some areas will moderate, some will flatten, and some will continue to rise sky-high. Instead of a bunch of regional bubbles, we'll have regional bubbles, healthy markets, AND crashes all at once! Fun for the whole family! :) (Image courtesy of the very appropriate Boojum.)