Wikinvest Wire

Dumb Things Said by the Fed

Friday, August 26, 2005

The Federal Reserve's wild weekend in Jackson Hole starts today. There will be lots of parties and late night antics to be sure. Loud and unruly economists stumbling through hotel lobbies in the wee hours, up to their rooms for some pre-dawn hanky panky with no consideration for other hotel guests in adjacent rooms.

Then finally trying to get a couple hours of sleep before showing up at the morning conferences bleary eyed, still reeking from the night before - winks, nods, and hand signals to each other as they sit there fidgeting, feigning interest in what another speaker is prattling on about, all the while planning more sordid fun for the rest of the day.

Or, maybe not.

While waiting to hear what will be said by the Fed in Wyoming this weekend, we look back at some of the things they have said in recent years - some of the dumber things that have come out of the mouths of Federal Reserve board members. We don't have to look back very far.

Michael Moskow, President of the Federal Reserve Bank of Chicago
August 25, 2005

"Moskow said mortgages such as interest-only loans and other specialized floating-rate products that hold down initial payments but are vulnerable to rising interest rates are generally good for the economy. That's because they've opened up home ownership to more people. That said, he emphasized that the Fed has felt it necessary to warns banks of added risks with these loans."
So, getting someone into a house that they couldn't otherwise afford by using risky loan products, with terms that the borrower probably doesn't really understand, is good for the economy? Yes, in the short-term this bids up housing prices which makes more people want to buy houses because the prices are going up - this creates construction and real estate jobs. Other people feel wealthy because housing prices are going up, and these people borrow against their homes and spend money, which adds to GDP. An excellent plan for the short-term, but what about the long-term?

Robert McTeer, President of the Federal Reserve Bank of Dallas
February 2, 2001
"The way Robert McTeer sees it, there's nothing wrong with the economy that couldn't be fixed with a little more consumer spending. 'If we all join hands together and buy a new SUV, everything will be OK,' said the president of the Federal Reserve Bank of Dallas."
Let's see, the average price for a gallon of regular gasoline in the years since this advice was offered was $1.38 in 2001,$1.31 in 2002, $1.52 in 2003, $1.81 in 2004, and $2.10 in 2005. On Tuesday, the national average was $2.58. So, not a bad suggestion really ... for about year. After that fuel costs for your gas-guzzling SUV would have risen dramatically, having almost doubled as of just a few days ago. There's that poor long-term thinking again - pretty dumb when you look at it today.

Alan Greenspan, Chairman of the Federal Reserve
February 23, 2004
"Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."
Yes, when rates go down, you can save lots of money. In that case, adjustable rate mortgages are great - far superior to fixed rates. But when rates go up, then you'd rather have a fixed rate. Guess what? Short-term rates started going up just a few months after this speech and there is no indication that they will stop rising anytime soon. That's why people like fixed rates. And, that part about households that "manage their own interest rate risks"? That whole idea is pretty dumb considering the surprising number of households that don't even understand what interest is.

July 20, 2005
And, indeed, since the late ’70s, central bankers generally have behaved as though we were on the gold standard.
This behavior must be occurring in some parallel universe somewhere, or maybe the reference is relative. Like, compared to the central bankers in Zimbabwe, we have generally behaved as though we were on the gold standard. We don't see any gold standard like behavior from our central bankers. All we see is a money and credit explosion for the last two decades, the likes of which the world has never seen. When they write the history books, it is unlikely they will refer to monetary policy during this era as being like the gold standard. This was just dumb.

Ben S. Bernanke, White House Chief Economist (former Fed Governor)
November 21, 2002
Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.
This was in reference to fighting deflation and how central banks can always create inflation if they need to. It may not sound all that dumb to most people today, however, it has the potential to be the all-time dumbest thing any central banker has ever said, if, in the coming years, the housing bubble goes bust and a new Fed Chairman looks to inflate another asset class to mitigate its fallout.

Your Recollections

We've really just scratched the surface here. Surely there are many, many more dumb things that Federal Reserve Board Members have said in recent years. Readers are encouraged to cite their favorites in the comments section.


Anonymous said...

didn't someone say that the currently high levels of debt were ok because house prices were so high?

David said...

those are great quotes. Bravo.

Anonymous said...

I hate to be the sourpuss here, but I actually did get a variable rate mortgage just after Greenspan made those remarks about how consumers could have saved a lot of money by doing so. (Bill Gross, from that bunch of Republican hacks over at Pimco, said more or less the same thing at more or less the same time.)

At the time, I was trying to refi my 6.75 fixed into something below 5.5, and all Citibank did was jack me around. But, variables at the time had a starting rate of 3.125, and when I mentioned to the folks at Citibank that I'd like a variable, all of a sudden the jacking around stopped, and I had no problem getting my refi. Yes, the rates went up over the next year, but then that Fisher guy came out with his famous "Eighth Inning" remark on CNBC (another nominee for dumbest thing ever said by a fed governor???), and the 10 year dropped like a rock, allowing me to do a "loan modification" in exchange for a nice little $350 fee to Citibank, and now I'm settled in at 5.25 for the next ten years, at which point I expect to have the sucker paid off. Over the course of the last year or so, I have kept my payments the same, with some extra lum sum payments reduced my principal by something like $29,000, and saved tens of thousands in interest. Citibank has been trying ever since to get me hooked on one of their "interest only" products.

No dice, Brice.

Now, how's that for "households . . . driven by fears of payment shocks but . . . willing to manage their own interest rate risks"?

Tim said...

When I wrote that, I was thinking more about the guy with the negative amortization loan who a year later wonders why his mortgage balance has gone up. What you have done sounds like a pretty good move.

Anonymous said...

To 9:40am Anonymous,

Congrats on your re-fi story! This is the "Mr. Yes" example of how to manage debt and interest rates. As a reader of this and other sources of financial info, that is to be expected (emphasis on the word 'read').

However, "Joe Sixpack" is the "Mr. No" example, getting his information about debt management from re-fi commercials touting "we used it to pay off our credit card debts and still had money left over to spend a week in [exotic locale]". The people who used IOMs or ARMs to reload their credit cards and then failed to switch back to a standard fixed rate before the curve headed north again are the ones at risk. I have no data at hand to back this up, but you may be the exception, rather than the rule.

Wise decisions and 'herd mentality' rarely go hand in hand. The fact that the Fed Reserve encouraged *consumers* to go with ARMs, then later cautions *lenders* to tighten up their lending practices, shows how much the Fed trusts the average consumer to make intelligent borrowing decisions.

Tim said...

I should have waited a couple minutes and saved some typing - well done Anon 10:37.

Anonymous said...

Fed "wild weekend" farewell speech. "The Greenspan Era: Lessons for the Future"


"History has not dealt kindly with the aftermath of protracted periods of low risk premiums".

Translation= I threw one hell of a party now good luck cleaning this sh*t up after I'm outta here...

Anonymous said...

Hey, have you read the latest from Jackson Hole?

"In the spirit of this conference, I asked myself what developments in the past eighteen years -- both in the economy and in the economics profession--were most important in changing the way we at the Federal Reserve have approached and implemented monetary policy.

* * *

". . . Our forecasts and hence policy are becoming increasingly driven by asset price changes.

"The steep rise in the ratio of household net worth to disposable income in the mid-1990s, after a half-century of stability, is a case in point. Although the ratio fell with the collapse of equity prices in 2000, it has rebounded noticeably over the past couple of years, reflecting the rise in the prices of equities and houses.

"Whether the currently elevated level of the wealth-to-income ratio will be sustained in the longer run remains to be seen. . . .

"Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."

Anonymous said...

>>>"In the spirit of this conference, I asked myself what developments in the past eighteen years -- both in the economy and in the economics profession--were most important in changing the way we at the Federal Reserve have approached and implemented monetary policy." <<

Can anybody add to the list of "developments" he gave in his speech?

Anonymous said...

I also would love to see you do a little critique of Alan Blinder's defense of Greenspan where he says Greenspan is "the greatest central banker who ever lived."


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