Credit & Debt: Bernanke And Greenspan Speak

Why is this man smiling?

Both the former Federal Reserve Chair and his successor have had occasions to opine in recent days, and if their output is any indication, the level of disconnect from reality is worse than we thought.

First we have Alan Greenspan saying that the worst is indeed over for housing, even as the NAR itself was forced to concede otherwise:

Greenspan said he expected inventory levels to come down at a "reasonably rapid pace" and that "it looks as though sales figures have stabilized." But he also said there would be actual price declines in housing. "That will have some impact on consumer expenditures," he said. "We haven't seen it yet." Separately, the National Association of Realtors reported Tuesday that the median price of a home dropped to $221,000 in October, a decline of 3.5 percent from a year ago. It was the biggest year-over-year price decline on record for an asset that many Americans use as a gauge of their financial well-being.

Then we have Ben Bernanke continuing to fight the last war through his remarks that the housing slide and economic doldrums are bellwethers for inflation, though most of the free world thinks otherwise:

One possible outcome is that increases in labor costs will largely be absorbed by a narrowing of firms' profit margins and not be passed on to consumers in the form of higher prices. The fact that the average markup of prices over unit labor costs is currently high by historical standards suggests some scope for this outcome to occur. If higher labor costs are mostly absorbed by firms and not passed on, then workers will see the gains in their nominal compensation per hour of work translated into greater real compensation per hour; in the process, workers would capture a greater share of the fruits of the high rate of productivity growth seen in recent years. The more worrisome possibility is that tight product markets might allow firms to pass all or part of their higher labor costs through to prices, adding to inflation pressures.

Even in the face of positive economic indicators such as increased home sales, wage gains, and employment increases, Bernanke still fears Inflation. Why? Because every dime that goes into your pocket is not going into Wall Street's coffers, and he has to keep the titans soothed. It's that simple.

For a different perspective on Bernanke's remarks, check out Calculated Risk's analysis. Am I right, and is Bernanke beating the inflation drum to scare the Fed into raising rates? Or is CR right, and is a downturn/recession on the horizon no matter what?

Time will tell.

Posted at November 28, 2006 10:03 PM

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Why is this man smiling? Both the former Federal Reserve Chair and his successor have had occasions to opine in recent days, and if their output is any indication, the level of disconnect from reality is worse than we thought. First we have Alan Greenspan saying that the worst is indeed over for housing, even as the NAR itself was forced to concede otherwise: Greenspan said he expected inventory levels to come down at a "reasonably rapid pace" and that "it looks as though sales figures have stabilized." But he also said there would be actual price declines in housing. "That will have some impact on consumer expenditures," he said. "We haven't seen it yet." Separately, the National Association of Realtors reported Tuesday that the median price of a home dropped to $221,000 in October, a decline of 3.5 percent from a year ago. It was the biggest year-over-year price decline on record for an asset that many Americans use as a gauge of their financial well-being. Then we have Ben Bernanke continuing to fight the last war through his remarks that the housing slide and economic doldrums are bellwethers for inflation, though most of the free world thinks otherwise: One possible outcome is that increases in labor costs will largely be absorbed by a narrowing of firms' profit margins and not be passed on to consumers in the form of higher prices. The fact that the average markup of prices over unit labor costs is currently high by historical standards suggests some scope for this outcome to occur. If higher labor costs are mostly absorbed by firms and not passed on, then workers will see the gains in their nominal compensation per hour of work translated into greater real compensation per hour; in the process, workers would capture a greater share of the fruits of the high rate of productivity growth seen in recent years. The more worrisome possibility is that tight product markets might allow firms to pass all or part of their higher labor costs through to prices, adding to inflation pressures. Even in the face of positive economic indicators such as increased home sales, wage gains, and employment increases, Bernanke still fears Inflation. Why? Because every dime that goes into your pocket is not going into Wall Street's coffers, and he has to keep the titans soothed. It's that simple. For a different perspective on Bernanke's remarks, check out Calculated Risk's analysis. Am I right, and is Bernanke beating the inflation drum to scare the Fed into raising rates? Or is CR right, and is a downturn/recession on the horizon no matter what? Time will tell.