Bernanke Blames Saving Glut for Housing Bubble

In yet another long-winded and self-serving speech, Bernanke blames everyone but the Fed for the housing and credit bubbles. Not once did he mention interest rate policy at the Fed. However, he did blame foreign investors and "the global savings" glut for contributing to the problem.

Given there were no highlights, let's tune into the lowlights from Bernanke's Remarks on the economic outlook at the International Monetary Conference, Barcelona, Spain.

In the financial sphere, the three longer-term developments I have identified are linked by the fact that a substantial increase in the net supply of saving in emerging market economies contributed to both the U.S. housing boom and the broader credit boom. The sources of this increase in net saving included rapid growth in high-saving East Asian countries and, outside of China, reduced investment rates in that region; large buildups in foreign exchange reserves in a number of emerging markets; and the enormous increases in the revenues received by exporters of oil and other commodities. The pressure of these net savings flows led to lower long-term real interest rates around the world, stimulated asset prices (including house prices), and pushed current accounts toward deficit in the industrial countries--notably the United States--that received these flows.

To be sure, the large inflows of savings and low global interest rates presented a valuable opportunity to the recipient countries, provided they invested the inflows wisely. Unfortunately, this did not always occur, as an increased appetite for risk-taking--a "reaching for yield"--stimulated some financial innovations and lending practices that proved imprudent or otherwise questionable.

This brief overview makes clear that both global and domestic factors have played important roles in recent developments in the United States. The housing and credit booms were driven to some extent by global savings flows, but they also reflected domestic factors, such as weaknesses in risk measurement and management and lax standards in subprime lending.

My Comment: That brief overview makes only one thing clear: Bernanke has no idea what he is talking about. There is no savings glut. Monetary printing in China to swap Renmimbi for US dollars (so that China could keep its currency artificially low) does not constitute a "savings glut". Nor does enormous carry trades in Japan. I have talked about the myth of the savings glut many times. Inquiring minds may wish to consider Global Savings Glut Exposed from September 2007 and Global Savings Glut Revisited from December 2006.

This nonsense is what happens when an academic meets the real world. That Bernanke cannot distinguish between monetary printing and savings is quite telling.

Inflation has remained high, largely reflecting continued sharp increases in the prices of globally traded commodities. Thus far, the pass-through of high raw materials costs to domestic labor costs and the prices of most other products has been limited, in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and will bear close attention. Futures markets continue to predict--albeit with a great range of uncertainty--that commodity prices will level out, a forecast consistent with our expectation of some overall slowing in the global economy and thus in the demand for raw materials. A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of Federal Reserve governors and Reserve Bank presidents for 2009 and 2010.

My Comment: This would be funny if it wasn't pitiful. "A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation." Translation: Inflation will stop once prices stop going up. Was that supposed to be a revelation? That was pathetic even for someone who thinks inflation is about prices.

However, Bernanke does not know what inflation is, and it sure is not about prices but about expansion of money and credit. Specifically, Bernanke fails to address why prices have been going up. The answer of course is monetary policy at the Fed, Congress spending money it does not have, and no fiscal discipline anywhere you look.

Unfortunately, the prices of a number of commodities, most notably oil, have continued upward recently, even as expectations of future policy rates and the foreign exchange value of the dollar have remained generally stable in the past few months. The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming.

My Comment: The idea that inflation expectations causes future inflation is more misguided nonsense. If you halt the expansion of money supply and credit, you halt inflation no matter what anyone's expectations are.

I have a simple solution for this madness: Want To Fix The Fed? Get Rid Of It.

Comments

[Think-About-It]

Michael, your comments are right on the mark. In my opinion the Federal Reserve Board has never worked (except by accident) because the premise is that a few bankers/economist can consistently predict the future and take priemtive measures to 'massage' the economy's ups and downs.

It can't be done and by trying the Fed actually increases volitility as everyone tries to predict and then reacts to their comments and rate changes. I better stop now before I lose it but one final question for you...

Is there a major industrial country that does not use a similar system, i.e., central control of their interest rates?

[ryoung8177]

Thank you! Thank you! The phrase "I'm from the government and here to help you" comes to mind. Here is a real idea; outsource the BLS to India, which will improve worker productivity. Then we could adjust the cost of food by the number of BLS employees who are not able to afford steak and that will be the end of inflation.

[CaptBob]

Well we sure taught those "High Saving" Aisians a thing or two!!
It'll be awhile before they're back to our table looking for another package of our high interest bearing, AAA rated, CDO packages--heavy with big mortgage "Tranche" filling.
The mere fact that the banks-who gererated this garbage--knew they could factor it off with a slice of profit and no risk to themselves was what drove the housing bubble---MORE!!--MORE!... a sure thing!!.
There's a lot of people who should be in Jail!!
The Feds low interest rates and liquidity was mearly a "facilitator"... they were too --Dumb??--or filled with avarice not to care??

[ustaad]

The Savings glut that he refers to is partly a result of monetary policy.
The US imports 2 billion dollars of stuff everyday (net of exports) and force feeds countries a steady supply of bonds that have lost money in inflation adjusted terms. I find it funny that his academic expectation is that the other countries should find a way to spend that money instead of trying to save it.
Bernanke's "cheap and easy money" policies stimulate spending and contribute to the deficit and eventually to the savings glut.

Am I missing something here?

[documentaryman]

Could it be that the Housing Bubble was caused by a combination of artificially low interest rates (the Fed) and the tax policy that virtually eliminated capital gains tax on residential housing sales (Washington) plus the sub-prime mortgages (Corporate Greed) that tried to ride these trends to mega-profits? When you say eliminate the Fed, don't you mean the whole Washington feeding trough?

[adan]

savings glut, huh?

is the pitiful interest i get on my savings to make sure i don't have no glut? :-)

[iThinkBig]

The article and all of these comments are excellent and right on the money. Alexander Hamilton, the first U.S. Treasurer stated that when the banks and government collude, it would lead to American citizens becoming homeless and penniless. That is now happening and fools in New York and Washington are not understanding how much impact Main St. being crushed is going to have on the bottom line.

Here's how my message to the American public would look if I were Bernanke: "

Hi, our Congress and Administration decided to devalue our currency. It was because we assumed foreigners would always service our public debts so we thought deficit's don't matter and squandered billions. Since we provided no oversight to the investment banking industry, the U.S. burned the global investment community with a trillion+ dollars of toxic subprime deravatives. Now the U.S. public is paying for the public debt with higher inflation.

Also, Index investors globally are now pouring there money into commodities because the U.S. financial system is not stable and is not trusted. While we know speculation accounts for 15% of a price of a barrel of oil, Congress has not decided to immediately take action in the amount of leverage hedge funds can utilize and because money is so cheap, Central Banks have lots of dough to lend to the hedge funds whom need to shore up there balance sheets because they are near bankruptcy.

Unfortunately this all trickles down to you where you as the U.S. citizen cannot get a loan, unless you have an 800 credit score rating and collateral twice the value of the loan your looking for.

I understand that the U.S. has no real energy policy to combat high oil or food prices but we hope the next President and Congress can come up with one, even though all three Presidential contenders have no real plan, but don't worry our government will create carbon credits program in an attempt to further tax the global citizen to make up for our bad choices, hubris and selfishness at the White House and financial community.

But don't be alarmed or afraid, because if the banking and economic system collapses, we have plenty of trains to supply you government cheese and wheat pasta rations. We wouldn't be partaking of that kind of food as we will be somewhere else if and when this occurs. But we'll be sure to write and stay in touch good and faithful U.S. citizens. Have a nice day.

[flow5]

Savings glut or not, the Fed should have followed a tighter monetary policy. And if this "glut" was real or global, then why wasn't it sterilized?

And time deposits (e.g., large CD's),a direct one-to-one, relationship to the volume of transaction deposits. But all reserve requirements against these deposits have been eliminated.

Eliminating reserve requirements against these deposits, (all of which originated from transaction deposits), is just another way of lowering average reserve requirments.

It should have already become obvious. The money supply can never be managed by any attempt to control the cost of credit. That is, the only tools capable of controlling the money supply in a free capitalistic society are legal reserves and reserve ratios.

[brianoh]

The US has many economic problems mainly relating to productivity and the service economy they have created at the behest of multinationals and investment banks. The current problems with the housing bubble was caused by Greenspan in order to protect an overpriced stock market in 2001. The Fed is illogical to put it mildly. Greenspan allowed the stock bubbles up to 2001 and when a correction was overdue, he prevented it and created a housing bubble. The US economy has been using asset inflation for about 15 years. It has to end eventually. Creation of liquidity to support overpriced assets is a bad strategy.