Dear Fed, It’s Not “Really Hard to Spot Bubbles”

From Wolf Street, by Wolf Richter

Source: Dear Fed, It’s Not “Really Hard to Spot Bubbles” | Wolf Street

Here are some visual aids to help the Fed spot the housing bubble.

Minneapolis Fed President Neel Kashkari was the latest Fed official to claim in an essay – thus following in the time-honored footsteps of former Fed Chair Ben Bernanke – that “spotting bubbles is hard,” that the Fed cannot see them, and that if it could see them, it shouldn’t do anything to stop them because it had only “limited policy tools,” and because “the costs of making policy mistakes can be very high.”

But it’s OK to use these “limited policy tools” to inflate the greatest bubbles the world has ever seen and then preside over the damage they cause to the real economy before they even implode.

Neither Kashkari nor anyone else working at the Treasury Department in 2006 – when they were tasked by Secretary of the Treasury Hank Paulson to look for signs of trouble because they were “due for some form of crisis,” as he writes – could see any bubbles, not even the housing bubble although it was already beginning to deflate.

“It is really hard to spot bubbles with any confidence before they burst,” Kashkari writes, specifically naming stock prices and house prices. “Everyone can recognize a bubble after it bursts, and then many people convince themselves that they saw it on the way up.”

So here are some visual aids I put together for Kashkari and other Fed governors. It will help them “spot” the beautiful housing bubbles in the US – because bubbles really aren’t hard to recognize before they burst, if you want to recognize them.

What’s hard to predict accurately is when they’ll burst.

The S&P CoreLogic Case-Shiller National Home Price Index for March was released today. It jumped 7.7% year-over-year, far outpacing growth in household incomes. This has been the case for years. In fact, real household incomes are almost back where they were in 2006 (/sarc). So what could go wrong?

At 198.26, the index surpassed the peak of Housing Bubble 1 in May 2006 by 11% (data via FRED, St. Louis Fed):

Since everyone called it a housing bubble after it had imploded, even Kashkari, today’s phase in the wondrous market is Housing Bubble 2, no?

The other day, Zillow reported that the national median home value in April rose 7.3% year-over-year to $198,000. It too beat the peak of Housing Bubble 1 ($196,600) set in April 2007. “It only took a decade,” Zillow said.

Read more at: Dear Fed, It’s Not “Really Hard to Spot Bubbles” | Wolf Street

 



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