Monday, January 11, 2010

Memo To the Fed: There WAS "Inflation!"

Now we have the spectacle of a regional Fed Reserve President saying that 'there was no inflation' during the 1990's.

“Historically this did not appear to create prolonged run-ups in asset prices, but changes in the recovery of employment in the past two recessions led the Fed to keep interest rates low for a long time,” he said. “Both periods featured prolonged increases in certain asset prices: for technology in the 1990s and housing in the 2000s. During this time, unemployment hit lows of 3.8 percent in 2000 and 4.4 percent in 2007, and inflation was low and stable.”

So in two consecutive sentences we read '[there were] prolonged increases in .....housing prices' AND "inflation was low and stable."

And you thought politicians were the only people capable of this crap.

In fact, the Fed (and BLS) DO NOT MEASURE housing prices as a component of inflation, which accounts for the "non-inflation" inflation in housing prices, which was noticeably horrible beginning in the mid-1980's.

HT: Ticker

Same song, different verse, written by the AUTHOR of the "Taylor Rule" mentioned:

Federal Reserve Board Chairman Ben Bernanke spent most of his speech to the American Economic Association on Jan. 3 responding to the critique that easy monetary policy during 2002-2005 contributed to the housing boom, to excessive risk taking, and thereby to the financial crisis.

Many have expressed the view that monetary policy was too easy during this period. They include editorial writers in this newspaper, former Fed policy makers such as Timothy Geithner (now the secretary of the Treasury), and academics such as business-cycle analyst Robert J. Gordon of Northwestern. But Mr. Bernanke focused most of his time on my research, especially on a well-known policy benchmark commonly known as the Taylor rule

...You do not have to rely on the Taylor rule to see that monetary policy was too loose. The real interest rate during this period was persistently less than zero, thereby subsidizing borrowers. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, reported in a speech on Jan. 7 that during the past decade "real interest rates—the nominal interest rate adjusted for inflation—remained at negative levels for approximately 40 percent of the time. The last time this occurred was during the 1970s, preceding a time of turbulence."

The bubble, which has also been defined as a "credit bubble," simply moved from one place to another--dotcoms to housing--before exploding.

HT: ZeroHedge

1 comment:

Shoebox said...

I wonder how they would explain that housing used to be 25% to 30% of monthly spending and now has moved to 35% to 40%? Oh, I know, Buuuuuusssh Tax cuts hurt the middle class!

This is another "who you going to believe, me or your lying eyes!"