Robert Shiller of the Case Shiller Index, spoke to Fox Business earlier this week (hat tip Ed Harrison). In this short chat, he stresses that the rise in housing prices so far this year look very encouraging, but could prove to be seasonal. He also points out that he is seeing what may be early bubble behavior in San Francisco and Phoenix, and even in Chicago and Atlanta.
If that is indeed happening, it’s not a bug but a feature. As many commentators, including yours truly, have pointed out, Greenspan was concerned about the deflationary impact of the dot com bust (somehow failing to recognize that a speculative bubble that is not fueled by debt is far less destructive than one turbocharged by borrowing, since the second type blows back to the financial system). Remember Ben Bernanke’s famous 2002 “Helicopter Ben” speech? Its title was “Deflation: Making Sure “It” Doesn’t Happen Here.” The Fed cut rates, not in its normal recession pattern of driving them really low for one quarter, at the very most two, but for an unheard of full nine quarters. The Fed was perversely indifferent to the housing bubble that resulted from overly loose money and overly lax regulation. Even in 2006, Bernanke maintained that there was nothing to worry about, that even though consumer debt levels has risen, consumer balance sheets were fine….because he thought the worse that could happen was that housing prices remained flat for a few years. Moreover the Fed is a fervent believer in the wealth effect, and housing has a much stronger wealth effect than stock market holdings. So a replacement housing bubble would be perfect, as far as the Fed is concerned.
The wee problem with this picture is the first time a central bank tried to engineer an asset bubble to stimulate domestic spending was in Japan, post 1985. The Plaza Accord had engineered a huge rise in the yen versus the dollar, and the Bank of Japan was concerned that the damage to the export sector, which was the driver of the economy, would lead to a crushing recession. So it dropped interest rates with the explicit aim of producing asset prices in order to stimulate more consumer spending. We know that movie ended.