Mathematicians – Not Economists – Should Run the Fed

“A number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida . . . Entire condo projects and upscale residential lots are being pre-sold before any construction, with buyers freely admitting that they have no intention of occupying the units or building on the land but rather are counting on ‘flipping’ the properties — selling them quickly at higher prices.”

-Jack Guynn, then president of the Federal Reserve Bank of Atlanta

“I don’t want to leave the impression that we think there’s a huge housing bubble. We believe a lot of the rise in house prices is rooted in fundamentals.”

-Stephen D. Oliner, Fed researcher

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For the longest time, I was astonished at what looked like gross incompetence and utter lack of comprehension at the US Federal Reserve. I previously found it mind boggling.

I no longer get upset over this, as I have discovered the fundamental flaw of the Federal Reserve errors. Wore than easy money, worse than Greenspan’s “flawed” ideology, is a simple error that the Fed keeps making.

Math.

The Fed seems to be somewhat ignorant of basic mathematics. As far as I can tell, they are unfamiliar with standard deviations. They don’t grok mean reversion. Change in delta, 2nd derivatives seemingly perplex them. Even mortgage amortization tables appear beyond their ken.

How else could you explain the recently released transcripts that show the Fed rationalizing away the burgeoning what their ultra-low rates had done? How on earth could a Fed researcher claim “the rise in house prices is rooted in fundamentals” ?

The Fed completely missed the credit bubble, and seemingly ignored the nascent Housing boom in 2004.

Greenspan continually insisted that not only could the Fed not identify a bubble in real time, but could not possibly pop it. Its cheaper to clean up afterwards the Maestro said.

The only explanation that makes any sense to me is that they are innumerate — the mathematical equivaency of illiteracy. All it required to identify any of these — as we, and plenty of others did — was to look at the prior history and compare metrics:

• Median Federal Overnight Rates (20th Century)

• Total Credit and Mortgage Available

• Median Home price to Median Income

• Rental versus ownership costs

Any one of these would have clued the Fed into something aberrational occurring. And yet they managed to miss this completely.

From now on, I will cease calling the Fed incompetent, and begin using the more accurate phrase “innumerate.”

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Previously:
Bernanke Still Does Not Understand Credit Crisis (January 4th, 2010)
http://www.ritholtz.com/blog/2010/01/bernanke-cause-of-credit-crisis/

Fed Transcripts Stoke Debate on Rates
SEWELL CHAN
NY, May 3, 2010
http://www.nytimes.com/2010/05/04/business/04fed.html

Fed’s Guynn Warned in 2004 Low Rates May Fuel Price Surge
Joshua Zumbrun
Bloomberg, May 1 2010
http://www.bloomberg.com/apps/news?pid=20601087&sid=asN.6J4RCnOo&

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