Saturday, August 27, 2005

The Fed's "meeting" in Jackson Hole

If you have not been watching the annual Central Bank meeting (sponsored by Kansas City Fed) taking place in on in Jackson Hole, you have missed a great deal.

A few highlights:

The NY Times reports on Greenspan's own comments:
"Fed chairman implicitly took aim at both the torrid run-up in housing prices and at the broader willingness of investors to bid up the prices of stocks and bonds and accept relatively low rates of return.

Both trends reflect what Mr. Greenspan said was the increased willingness of investors to accept low "risk premiums, a willingness based on a complacent assumption that the low interest rates, low inflation and strong growth of recent years are likely to be permanent."

The Seattle Times furthers these comments:
"Greenspan, however, said people shouldn't count on that paper wealth, which can evaporate if economic conditions deteriorate rapidly.

"What they perceive as newly abundant liquidity can readily disappear," he said. "Any onset of increased investor caution" could cause home and stock prices to drop, he noted.""

While the London Times is a bit harsher saying that the US is heading for house price crash:
"In a pre-retirement speech to fellow central bankers at Jackson Hole, Wyoming, Mr Greenspan said that people were investing in houses as if they were a one-way bet, not allowing for the risk of price falls. He said “history had not dealt kindly” with investors who kept ignoring risks."...."Mr Greenspan’s comments were reminiscent of his 1996 inveighing against “irrational exuberance” on the stock market...."

Much time has also been spent on looking back at Greenspan's reign and looking ahead to who will be the next chairperson when he retires in January. For instance, Reuters reports on Robert Rubin's comments:
"Former U.S. Treasury Secretary Robert Rubin, lavish in his praise for Federal Reserve Chairman Alan Greenspan, said Friday his successor should be market savvy because large problems may lie ahead...."Looking forward, our loss over recent years of the fragile political coalescence around fiscal discipline, our currently projected 10-year fiscal deficits...our extremely low personal savings rate and high levels of personal debt, all suggest that the next Fed Chairman could face -- at some point in the future, there's no way of knowing whether it is years out or sooner -- an even greater need for the understanding and experience to deal with serious market difficulties""
And the conference is not even over yet!

5 comments:

Gas Fairy said...
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Anonymous said...
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FinanceProfessor said...

I accidentally deleted this from

sorry! the other two were junk postings and I accidentally hit delete all...by then it was too late:

Fed chairman implicitly took aim at both the torrid run-up in housing prices and at the broader willingness of investors to bid up the prices of stocks and bonds and accept relatively low rates of return ... Both trends reflect what Mr. Greenspan said was the increased willingness of investors to accept low "risk premiums,

Exactly who are the entities taking additional risk and who is bidding up stock prices? Stock prices, as measured by the S&P500 at 1205, are down for the year and way down from the near 1500 levels of 1999.

Are traditional home buyers, using a longer term fixed rate mortgage taking increasing additional risk? The long end of the yield curve is relatively low and haven't spreads between mortgage-backed-types of securities and treasuries been narrowning? This means that the buyers of mortgage-back-types of securites, traditionally bigger, sometimes foreign investors are taking on increasing, additional risks. Conversely, isn't the small American home-buying-fixed-rate-mortgage-holder assuming less risk?

For example, if the longer end of the yield curve rises and the the spreads between mortgage-backed securities increases, the unhedged institutional investors get whacked, not the home buyer. Isn't the home buyer hedged because the theoretical value of his mortgage declines, offsetting the price of his house?

Ironically, a few months back, Greenspan suggested that small home buyers use more adjustable rate mortgages -- an endeavor that would have transferred more interest rate risk from the large institutions to the small home buyer.

I'm not an economist and don't understand anything about real estate, but it seems that contemporaneous factors (whatever they might be) that influence both asset (house) prices and the longer end of the yield curve explain the rising prices of houses as much as the propensity of individual home buyers to take on increasing levels of risk.

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Posted by squarks to FinanceProfessor.com at 8/27/2005 03:28:29 PM

Online Degree said...

This might be slightly off the topic but we are certainly seeing dramatic changes in house prices in Utah. The prices for homes in one part of the state have been steadily rising about 10k every other month!