Interest Rate Roundup

Monday, November 06, 2006

Fed says: "Oops, my bad."

In the 1995 movie "Clueless," Alicia Silverstone's character goes for a driving test, almost runs over a cyclist, knocks the mirror off a parked car, and responds with nothing more substantial than: "Oops. My bad." Naturally, she fails and doesn't get her license.

It was funny at the movies. It's no so funny these days, when it's the Fed talking about the housing bubble/bust. Specifically, I'm referring to the Nov. 2 comments from Dallas Fed President Richard Fisher, who said:

"In retrospect, the real fed funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer that it should have been. In this case, poor data led to a policy action that amplified speculative activity in the housing and other markets. Today, as anybody not from the former planet of Pluto knows, the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country. It is complicating the task of achieving our monetary objective of creating the conditions for sustainable non-inflationary growth."

I have to give Fisher credit for at least partially admitting the Fed's role in this horrible mess. But even he blames bad inflation data for prompting the Fed to keep rates too low. How about "failing to put the darn data down and look out the window every once in a while." The massive speculation ... the dot-com-like frenzy in housing -- it was obvious to those of us paying attention to our financial environs. Why didn't the army of experts at the Fed see it? And why didn't they act before things got too out of control, either by tightening monetary policy or tightening mortgage lending regulations?

I'd also note that Fisher is in the distinct minority here. No other Fed official has made comments like his. In fact, lots of Fed economists have been busy publishing papers claiming either: A) There was no bubble B) Okay, there was a bubble, but it was fueled by fundamentals or C) There might have maybe been a bubble in a few places, but it doesn't matter. There won't be a bust and even if there is one, it won't be bad.

Then of course, there's former Fed Chairman Alan Greenspan, who blamed the fall of the Berlin Wall for the housing bubble. That was a nice one.


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