Steady As She Goes

When last we checked, Federal Reserve Chairman Alan Greenspan was pointing out the difficulty he was having NOT seeing a lot of local real estate bubbles and Money Magazine was doing their best to calm everyone's nerves through some creative headline writing.

That was last weekend - so, what's happened since?

On Tuesday the minutes from the May 3rd FOMC meeting were released. The basic message was "steady as she goes". Transitory slower growth, inflation expectations well contained, accommodative policy, measured pace - we've heard this all before.

The only item of interest was this comment:

"... a number of local real estate markets were still regarded as "hot," with signs of possible speculative excesses in some areas."

Somehow, the image of Captain Edward J. Smith and his officers meeting in a windowless cabin room below deck comes to mind. Above them, passengers drink and dance in the grand ballroom as the giant ocean liner steams ahead - steady as she goes.


On Wednesday, a crisp clear day, second mate Jack Guynn took a stroll around the promenade deck, and while peering into the distance, he noticed something on the horizon:

"... in several markets across the country, housing prices in the past year have appreciated more than 30 percent, a rate that in my view is unsustainable. There are submarkets in our Southeast region-notably in coastal Florida-where you hear about speculators buying housing units-sometimes multiple units-just to flip them for a quick profit. And it seems like every week brings new stories about aggressive financing arrangements that encourage and enable such real estate transactions. I have to tell you that some of these stories we’re hearing about residential speculation make me uncomfortable, and the potential imbalance of supply and demand in housing in some markets is something I have been speaking out about for more than a year."

It is not known whether this sighting was reported back to the captain. Probably not. Recently, the captain has been preoccupied by some problems in the engine room. It seems that lately, there have been difficulties in controlling the speed of the giant ship.

In attempts to moderate the ship's speed, they have been gradually reducing the amount of coal they add to the furnaces, but it is not having the desired effect - in fact the ship seems to gather pace instead.

The captain is fearful of cutting back too much on the fuel because experience has taught him that starving the furnaces may cause the engines to seize up. There may be difficulty re-starting the engines and the ship may flounder at sea - bad weather is in the forecast.

Lately the engines have been a bit tempermental and upredictable. So, with the support of his best officers, the captain continues to gradually reduce the amount of fuel - at a "measured pace".

The ship's crew has never seen a phenomenon like this - where less fuel does not slow the ship - the captain calls it a "conundrum".

On Thursday, two other officers, Gamlich and Bies, pondered the engine room problems:

Fed Governor Edward Gramlich, speaking in Paris, said the measured rate increases could continue.

"I honestly don't know what it's going to take. It just appears that long-term rates cannot stay at this low level," Bies said.

The long rates puzzle dovetails into another worry for policy-makers, a hot housing market that has recently attracted the kind of speculative cash associated with stock market bubbles of yore.

It is fortunate that the ship is built so sturdily. On older model ships, not being able to effectively control the speed would have been a much greater concern, but recent ship building technology has enabled so many safeguards to be designed into the system - there is little need to worry.