Federal Reserve Governor Mark Olson (St. Louis), was quoted on the wires yesterday saying that he thought that there was not a "bubble" in the U.S. housing market. His specific quote (in the Q&A) was:
``In order for there to be a true bubble, there has to be a single market. There are markets where the pricing has exceeded any rationale for that increase. We will likely to see a decline in those markets...We continue to look at housing values, at housing prices....England, for example, is clearly in a bubble situation in housing. We don't see that to the same extent in the U.S."
There are a few comments worth pointing out with regard to Olsen's commentary.
First, one must understand that the positions for the Fed board of governors and the various bank presidencies are by definition political jobs. Yes, the candidates have to be qualified from an economics standpoint; they all have advanced degrees in economics. But the essence of these positions is political, not economic. As a result, the actions taken and the words spoken by these politicians/economists should be filtered in the same manner as one would filter the promises and pabulum of career politicians.
Second, Olsen's commentary fits nicely into a long history at the Federal Reserve of not understanding the dynamics of nor their effect on the markets in which they operate. Specifically, in December 1996, Greenspan was famously quoted for suggesting that the stock market was experiencing "irrational exuberance" when the DOW was at 6000. Then of course, Greenspan flip flopped in 1999 and suggested that the "New Economy" was responsible for what seemed to be unsustainable increases in asset prices when the DOW was at 11000. Two years later in his annual Jackson Hole speech of 2002, Greenspan stated that asset market bubbles are impossible to detect while underway and can only be identified once popped. The DOW was at 8500.
So according to official Fed policy then, the history of asset markets in the U.S. reads like this: in 1996 there was a stock bubble; in 1999 there was no bubble; in 2002 there was a stock bubble after all but it had burst; and in 2004 there is no housing bubble in the U.S., just in England.
The third and final point that should be made regarding Mark Olsen's comments is this. That the market for housing is diversified across geographies, with certain geographies having different supply and demand characteristics is, prima facie, true. True as well is his comment that there is no one single "exchange" where home owners can go to liquidate their asset.
However, neither of these observations prevent an irrational increase in housing prices. In fact, Olsen admits as much by saying that England does have a bubble and the U.S. does not. How does he contradict his own argument? The English housing market, though different on the margins to the U.S. market, has nearly the same characteristics in terms of geographical differences and lack of single "exchange" as we do. But, according to Olsen, England, with a vastly similar housing market dynamics as the U.S., can have a bubble but the U.S. cannot. Such assertions are disingenuous at best and an outright falsification at worst.
Olsen fails to recognize the single most important similarity between the English bubble and the U.S. non-bubble: cheap credit. It is manifestly cheap credit (low interest rates, as facilitated by the Fed and the BOE) that is both the causa proxima and causa remota of both housing bubbles: the one in England and the one in the United States.
It has been said that only politicians are capable of looking at a pig and calling it a cow.
We should add to their number economists working at the Federal Reserve.
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