Archive for September 6th, 2007

Feldstein on Housing Markets

September 6, 2007

Comments from Feldstein are always welcome as he puts his views in a very simple manner. I have covered a few of his papers and speeches here and here.

He always shares his views on the papers/views presented in the Annual Symosium held by Kansas City Fed.  His speech which was not there till yesterday has now been put online.

He says the housing sector problems can be summarised as 3 broad problems:

1) A sharp fall in prices could lead to fall in home building that could result in a recession
2) A subprime problem could lead to widening of credit spreads and freezing of credit markets
3) A decline in Home equity loans and mortgage refinancing could lead to greater decline in consumer spending

Read the speech for details on each point.  

What are his suggestions for the monetary policy?

His take is agreed Central bank’s mandate is to achieve price stability but it cannot let a slowdown in the economy to avoid bailing out the market participants that have taken risky positions.

And he says that there is more to financial markets (lack of trust, inability to value securities etc) than just liquidity and a problem in former along with slowdown in housing would lead to slowing economy.

Now when one gets a feeling that he advocates interest rate cut,  like a typical economist, he flashes his second hand. But then it is obvious as everything in eco has two sides to it. He says but Fed has to look at inflation as well as the falling $, higher food prices etc would fuel inflation. So it is about balancing growth and inflation together. And hence it is a tight rope walk for Fed. Tough times ahead for Bernanke and his team.

Update: Willem Buiter has some superb thoughts on Feldstein paper.  He points to ideas I had completely missed.

Feldstein has long stated that for US Households have to increase its savings in order to manage its huge current account deficit and correct the global imbalances. And in his speech he says becuase of this housing problem the consumoption could come down resulting in slowdown etc.

To this Buiter adds, how would savings increase if consumption does not come down? 🙂

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Assorted Links

September 6, 2007

1. The Beige Book (it summarises all the developments in eco from all 12 Fed regions) is out. WSJ provides a summary.

2. Willem Buiter has a nice post on the National Health System at UK.

3. Satyajit Das (a derivatives specialist) explains this crisis is unwinding of gigantic liquidity bubble.

4. Kanika Datta has a super article on Indian MBA system. We always overdo things in India especially with degrees. Everyone wants to do an MBA as no other occupation gives them a job. This makes too many MBAs in the country and we have something like a vicious circle.


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