"The Federal Reserve has no intention of preserving all of the recent gains in home price values, said Federal Reserve board governor Donald Kohn on Thursday. If real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,' Kohn said in a speech."
"In his remarks, Kohn attacked the popular 'Greenspan put' theory that Fed policy would always protect investors from sharp asset market drops while doing nothing to restrain these markets when prices rise. 'This argument strikes me as a misreading of history,' Kohn said. 'Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk,' he said."
"'Whatever might have once been thought about the existence of a 'Greenspan put,' stock market, investors could not have endured the experience of the last five years in the United States and concluded that they were hedged on the downside by asymmetric monetary policy,’ Kohn said."
“‘The same consideration apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode. Homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,’ Kohn said.”
Am I misinterpreting, or does the bolded quotation mean that the Fed has raised short-term interest rates higher than it would have otherwise in order to prick the housing bubble? [Which means, assumedly, that the Fed won't STOP raising rates until housing prices decline?]
That is exactly what he said. But the most important point of his statement is that the Fed will not act to prop up housing prices in Bubbletopia. That being California, Arizona, Nevada, Florida, Mass and the DC area. Ya'll are on your own. The Fed didn't bail out the dot com speculators, even though they lost $8 trillion, and there is no reason for them to bail out housing speculators.
Fed to Real Estate Speculators: Drop Dead.
I am glad the mainstream blogs are finally picking up on this. What took ya'll so long? :-) The popping of the housing bubble will be one of the major news stories for a long time to come.
I do think AG's endorsement of ARMs a couple years ago was intended to strengthen the Fed's hand, though. With an inverted yield curve, it's painfully obvious the Fed is pushing on a string here, at least in regard to long-term rates.
However, I think it's a bit of stretch to say that the Fed won't stop raising rates until housing prices decline. Perhaps the old "leaning against the wind" metaphor might be more accurate.
Risk premium. If valuations are unreasonably high, financing them is riskier, and interest rates on loans using that value as collateral higher.
Think of it like a loan to purchase dot-com stocks in early 2000.
The Fed has decided to add new money, or take money away,
at some rate decided every so often, based on leading indicators of inflation.
They buy or sell debt to do this, and the interest rate
rises (or falls) to the ``target'' as the economy responds.
That's the actual causality order once the operation of leading indicators of inflation is included in the calculation.
I think that you are misinterpreting. Kohn is acknowledging that a wealth effect and equity extraction from housing means that there is more liquidity in the system than there otherwise would be, so the Fed has to tighten more than it otherwise would have to counter incipient consumer inflation.
Fed tightening may or may not lead to erosion of home values, and Kohn is saying that the Fed won't prevent that, there is no "Bernanke put" on home values. But if there is a secret policy to intentionally "prick the bubble", it's still secret. Official policy, for better or worse, is not to second-guess markets on asset prices, and I don't think Kohn's remarks qualify as even a hint of a revision.
Of course you have been hoping for a crash for quite a while so every bird is the arrival of spring.
"Enoch", since you don't believe there is a bubble and that housing in California is priced rationally, why do you get so angry and defensive when people discuss this subject? It seems rather silly to rudely attack people on a message forum for no good reason, "Enoch", especially when you are so certain of your opinion. Are you afraid that critically discussing the real estate market will cause housing prices to crash, and if you attack enough people to shut them up a crash can be avoided?
Chill out, "Enoch". Let us "bitter renters" and crazy "bubbleheads" continue with our delusions. You know that housing prices can only go up, and a 80/20 no-doc interest-only option ARMs are safe ways for regular folks to purchase those $600,000 tract houses. Right, "Enoch"?