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Thread: The Role of House Prices in Formulating Monetary Policy

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    Join Date
    Mar 2006
    Boston, Mass.

    Default The Role of House Prices in Formulating Monetary Policy

    The Role of House Prices in Formulating Monetary Policy
    January 17, 2007 (Fed Governor Frederic S. Mishkin)

    At the Forecasters Club of New York, New York, New York

    Over the past ten years, we have seen extraordinary run-ups in house prices. From 1996 to the present, nominal house prices in the United States have doubled, rising at a 7-1/4 percent annual rate.1 Over the past five years, the rise even accelerated to an annual average increase of 8-3/4 percent. This phenomenon has not been restricted to the United States but has occurred around the world. For example, Australia, Denmark, France, Ireland, New Zealand, Spain, Sweden, and the United Kingdom have had even higher rates of house price appreciation in recent years.

    [blah, blah, blah, blah...]

    Large run-ups in prices of assets such as houses present serious challenges to central bankers. I have argued that central banks should not give a special role to house prices in the conduct of monetary policy but should respond to them only to the extent that they have foreseeable effects on inflation and employment. Nevertheless, central banks can take measures to prepare for possible sharp reversals in the prices of homes or other assets to ensure that they will not do serious harm to the economy.

    AntiSpin: Since 1955, a crashing housing market attended by a greater than 30% decrease in housing permits issued over 15 months leads to recession and unemployment as surely as darkness arrives in the evening in Boston by 6PM in winter. So we can read this as an announcement that the Fed is warming up the printing presses for a big run in the not too distant future. No better way to counter the potential for "serious harm to economy" than create yet another new asset bubble to cover the damage from the collapse of the last one–tech stocks, to housing, to... what?

    The trick is to allow the Monthly Payment Consumer to convert illiquid assets into liquid assets. Houses into cash-out refinancings, for example. Now that most of the inflated price "equity" has been extracted from US homes–ok, not only the US but homes in all nations with central banks that played the same game of low interest rates and tax incentives (includes the UK and Ireland, excludes Germany)–what illiquid assets from savings of old are left for Americans to turn into ready cash? Sharp eyed iTulip forum member Christoph von Gamm wryly suggests 401(k) and IRA accounts are a potential next target.

    If we see rule changes to allow these accounts to be turned into cash without tax or early withdrawl penalties, what are we supposed to think about our government's dedication to building an American middle class with sound retirement savings?

    As for the housing bubbles in Australia, Denmark, France, Ireland, New Zealand, Spain, Sweden, and the United Kingdom which were, in this Fed governor's opinion, worse than the US bubble, while no housing bubbles appeared in Germany, Italy, and other European nations, perhaps the fact of euro zone one-size-fits-all interest rates had something to do with it?
    Last edited by EJ; 01-18-07 at 01:47 AM.



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