What Bernanke Didn't Say About Housing
One of the more interesting exchanges at Ben Bernanke's testimony to the Financial Services Committee today was the one between the Federal Reserve chairman and Representative Scott Garrett, a Republican from New Jersey.
Citing Bernanke's assertion that one of the benefits of QE had been the rise in home prices, Garrett said the following:
"Previously you have said that the Fed's monetary policy actions earlier this decade, 2003 to 2005, did not contribute to the housing bubble in the U.S. So which is it? Is monetary policy by the Fed not a cause of inflationary prices of housing, as you said in the past? Or is it a cause of inflating prices of housing? Can you have it both ways?"
"Yes," Bernanke said, much to Garrett's surprise. The increase in home prices now is justified by the low level of mortgage rates, he said. On the other hand, those rates averaged 6 percent in the early part of the last decade and "can't explain why house prices rose as much as they did."
What he didn't say was that the percentage of adjustable-rate mortgages soared to a record 37 percent of total mortgage volume in 2005. From mid-2003 to mid-2006, ARM volume averaged 30 percent. The interest rate on ARMs is priced off the Fed's overnight rate. It was this type of loan that witnessed the most egregious underwriting abuses and the highest delinquency and foreclosure rates.
Garrett 1, Bernanke 0.
Garrett wasn't finished. He asked Bernanke about another presumed benefit of QE: higher stock prices.
"I'm sure you're familiar with Milton Friedman's work that says that people only really consume off of their permanent income, which basically means that you don't consume -- increase consumption -- because your stocks have gone up in the marketplace," Garrett said, before wandering off into areas such as how seniors should invest, "risk-taking" and "price discovery" in a market distorted by the Fed.
These are all good questions. I've asked many of them myself, most recently in my column today. The Fed is convinced it has the tools, regulatory wherewithal and forecasting acumen to prevent a misallocation of credit, better known as an asset bubble, with the potential to destabilize the financial system.
Like Congressman Garrett, I'm not so sure.