Why I Don’t Want Ben Bernanke’s Job

Will the Federal Reserve move to reduce interest rates i.e. the prime lending rate in response to the problems being experienced in the financial sector? Take a look at this analysis from James Hamilton. It looks like they already are. Brad DeLong is, no doubt, correct:

…Ben Bernanke is more aware than any other possible Fed Chair that large-scale housing asset price deflation threatens to have the same bad consequences as large-scale commodity price deflation, and I don’t see a future in which he allows housing prices to fall without first taking major steps to prevent it.

Calculated Risk has been all over this story for years and is a great resource on the latest developments.

What to do? Not taking action risks a slide into recession (or worse) on the back of a credit crunch. Do we want to reward more risk-taking? Some think so cf. this post. The argument is made succinctly:

1. The housing boom was a good thing; therefore
2. Far from worrying about moral hazard, the Fed should be deliberately rewarding those who participated; and
3. (At least according to my reading of the macroeconomy) The Fed should encourage the continuation of a housing boom (or something of that nature).

I’d like to see measures a little more targeted than reducing the prime rate. Is Dean Baker’s plan a good one? It appears to match my intuition on only subsidizing those who are actually severely injured. Does it do anything to stave off a credit crunch?

For the last several years I can’t tell you how many economists I’ve seen complaining about the low U. S. savings rate. Reducing interest rates depresses savings and rising inflation as a consequence of reduced interest rates will strip the savings of those who’ve been so imprudent as to save (and reduce the incentive to save further).

I wouldn’t want Ben Bernanke’s job.

10 comments… add one
  • PD Shaw Link

    A quick look at the census figures indicate there were over 13 million vacant housing units in 2005, that’s roughly 12% of all housing units. There are no doubt a variety of characteristics of these vacant dwellings, ranging from no plumbing horrors to secondary vacation homes. But the notion that the economy can be primed by keeping the housing boom going strikes me as Soviet economics.

  • I suspect that with housing as with employment there is some innocuous, “normal” rate of vacancy. If your point is, as I take it, wondering whether fueling speculation is seund economic planning, I think it’s a perfectly reasonable question.

    My take on the housing boom of the last six or seven years has been that there’s been too much cash chasing sure things. When the stock market became less than a sure thing, a lot of hat money went into housing speculation.

  • PD Shaw Link

    I guess I am reacting to the second quote (housing sales have been good for the economy, let’s sell more houses). Somewhere along the line supply and demand have to meet.

  • I think the more serious question is whether it makes a difference whether ecnomic prosperity is based on a speculative bubble or on more patient investment. My intuition is that it does but I don’t have the facts or figures to back my intuition up. (One of these days I need to write a post on my certainty scale—I use different words like “intution”, “understanding”, “guess”, etc. to mean differing levels of certainty.)

    BTW I’ve believed for years that the problem with our economy was insufficient corporate capital spending. That’s the reason (one of the several) I thought the the Bush tax cuts (or, as their more vocal opponents put it, tax postponements) were imprudent. Insufficiently targeted and aimed at the wrong targets—there was no lack of consumer spending.

  • PD Shaw Link

    Dean Baker’s plan is interetsing, but I have at least one problem. The notion that the owner gains a right to a lifetime tenancy bothers my free market side. Its a restraint on the owner’s ability to sell the property and may impede the highest economic use of the property in the future. Short-term, I see a lot of benefits, so perhaps we could make it a right to a five-year lease.

  • I’m not convinced yet that there really is a problem there to be solved with borrowers. I’m not closed to the idea but I’d like a little more data.

    At this point the greater problem and greater danger seems to be with lenders and I don’t understand how Dean’s plan deals with that.

  • PD Shaw Link

    My hierarchy of concerns starts with people not having a place to live. This might be a pretty small slice. Its hard for me to tell; the average non-prime borrower appears to have higher than average income, but perhaps lives in a high cost housing area. My second tier of concern are communities/neighborhoods that face a disproportionate number of foreclosures. Bakers’ plan might be a good solution to that set of problems since it keeps foreclosed houses occupied. My third concern is the macro economy. This probably should be the highest concern, but I’m skeptical about what the government can do at this point that wouldn’t create its own perverse incentives.

    But I’m always willing to learn. BTW/Calculated Risk is great. I think it explained today why Krugman was wrong about the new lending insitutions not being able to modify their loans.

  • My main concern at this point is a hasty bail-out to save the speculative housing purchases of top decile (or smaller) income folks while doing little to deal with the macro issues.

  • Of course it makes a difference – speculative bubbles misallocate resources.

    On the borrower side, it’s hard to say as of yet.

  • Re the Dean Baker plan, presuming it was put in place along the lines described what it could be helpful for it staving a “rush to the exit” or liquidation panic if there is in fact in the US of A a massive foreclosure wave coming. That could stave off a rolling wave of insolvency through the financial actors tied to housing, in enabling a more orderly deflation of the housing bubble.

    The real risk at present, for the global economy, is the US setting off such a rush to the exits, which can be quite damaging and irrational – damaging even to unrelated financial and economic parties.

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