Observations On Bernanke

Like Paul Krugman, I am torn over the issue of Bernanke’s confirmation.  Certainly, he was instrumental in bringing us back from the brink.  Regrettably, he was also instrumental in getting us there in the first place.  Here are some of my observations about Dr. Bernanke over the past several years.

On August 9, 2005, Bernanke, then chairman of president George W. Bush’s Council of Economic Advisors, met with the president and subsequently fielded questions from the media.  I recall the question below as if it were only yesterday.  (Director Hubbard is Al Hubbard, then Director of the National Economic Council.)

Q Did the housing bubble come up at your meeting? And how concerned are you about it?

DIRECTOR HUBBARD: Let me let Ben answer that question.

CHAIRMAN BERNANKE: We talked some about housing. There’s a lot of good news on housing. The rate of homeownership is at a record level, affordability still pretty good. The issue of the housing bubble is one that people have — whether there is a housing bubble is one that people have raised. Housing prices certainly have come up quite a bit. But I think it’s important to point out that house prices are being supported in very large part by very strong fundamentals.

And particularly, we have a strong economy, we have lots of jobs, employment, high incomes, very low mortgage rates, growing population, and shortages of land and housing in many areas. And those supply-and-demand factors are a big reason for why housing prices have risen as much as they have.

I think over a period of time, the housing prices are likely to stabilize. I don’t expect them to keep rising at this rate indefinitely; I don’t think anybody really does. But, again, I do think that the bulk of the increases are associated with strong economic fundamentals.

Bernanke’s position on housing would soon begin to evolve, and continue to do so over the next couple of years, as economist David Rosenberg — then plying his trade for Merrill Lynch — chronicled beautifully in August 2007:

“Low mortgage rates, together with expanding payrolls and incomes and the need to rebuild after the hurricanes, should continue to support the housing market. Thus, at this point, a leveling out or a modest softening of housing activity seems more likely than a sharp contraction, although significant uncertainty attends the outlook for home prices and construction. In any case, the Federal Reserve will continue to monitor this sector closely.” (15 February 2006).

“At this point, the available data on the housing market, together with ongoing support for housing demand from factors such as strong job creation and still-low mortgage rates, suggest that this sector will most likely experience a gradual cooling rather than a sharp slowdown.” (27 April 2006).

“Home prices, which have climbed at double-digit rates in recent years, still appear to be rising for the nation as a whole, though significantly less rapidly than before. These developments in the housing market are not particularly surprising, as the sustained run-up in housing prices, together with some increase in mortgage rates, has reduced affordability and thus the demand for new homes.” (9 July 2006).

“Although residential construction continues to sag, some indications suggest that the rate of home purchase may be stabilizing, perhaps in response to modest declines in mortgage interest rates over the past few months and lower prices in some markets.” (28 November 2006).

“Some tentative signs of stabilization have recently appeared in the housing market: New and existing home sales have flattened out in recent months, mortgage applications have picked up, and some surveys find that homebuyers’ sentiment has improved. However, even if housing demand falls no further, weakness in residential investment is likely to continue to weigh on economic growth over the next few quarters as homebuilders seek to reduce their inventories of unsold homes to more-comfortable levels … Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.” (14 February 2007).

“Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency. We will continue to monitor this situation closely.” (28 March 2007).

“The rise in subprime mortgage lending likely boosted home sales somewhat, and curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters. Moreover, we are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets. All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable”. (17 May 2007).

“Of course, the adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected. Thus far, however, we have not seen major spillovers from housing onto other sectors of the economy … However, fundamental factors–including solid growth in incomes and relatively low mortgage rates–should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.” (5 June 2007).

“Rising delinquencies and foreclosures are creating personal, economic, and social distress for many homeowners and communities — problems that likely will get worse before they get better … even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further as builders work down stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time.” (17 July 2007).

Now let’s get back to Bernanke’s August 2005 presser.  The fundamentals were anything but strong, as Rosenberg had pointed out in this prescient piece (a true gem of research) he penned in August of 2004, which I wrote up over at Blah3.com after the bubble had popped.

In response to Bernanke’s affordability comment at the press conference, I dropped him a note through then Chief of Staff Gary Blank:

Dear Mr. Blank:

On August 9, Dr. Bernanke participated in a press briefing during which he fielded questions about his meeting with the president.

Among the questions Dr. Bernanke was asked was this one:

Did the housing bubble come up at your meeting?  And how concerned are you about it?

Dr. Bernanke’s answer, in part, follows [emphasis mine]:

We talked some about housing.  There’s a lot of good news on housing.  The rate of home ownership is at a record level, affordability still pretty good.

I have reproduced below two charts created by brokerage firm Merrill Lynch using data compiled from the National Association of Realtors.

The charts speak for themselves:  First-time buyer affordability has collapsed to a 16-year low, and overall homeowner affordability has plunged to a 14-year low.

So, Mr. Blank, my question is simply this:  Given the hard data, on what basis did Dr. Bernanke make the claim that housing affordability is “still pretty good”?

Below is an updated chart of the National Association of Realtors Monthly Housing Affordability Index, one of two I’d included in my letter.  At the time Dr. Bernanke spoke (solid line), the fact of the matter is that housing affordability was already at about a 14-year low — hardly “still pretty good.”  (The dotted line is where it’s gone since, which actually is “pretty good.”)

[Source: National Association of Realtors]

I never did get a response.  Fancy that.

Regardless, unlike Calculated Risk, I’m not sure we should be looking for a better steward for the Fed at this time.  I believe the economy is still way too fragile and the risks of new Fed leadership at this time are too great.  Personally, I’m with the “Don’t Block Ben” crowd.  If Bernanke’s confirmation is not to be, however, my preference would be to see San Fran Fed president Janet Yellen get the job.

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