On Nov 4, 2005, at 11:32 AM, Jim Devine wrote:
Jubak's Journal
5 reasons the Fed will fumble in 2006
Even with a new chief at the helm, the Fed is heading toward a policy
blunder that will inflict a lot of pain on investors. Here are five
big reasons why.
By Jim Jubak
<snip>
• When all you've got is a hammer, all problems look like nails.
Raising interest rates may be the worst available tool for fighting
inflation caused by higher energy prices. But what other tools are
available? The other players in Washington show no inclination to
break out their economic policy tools -- and it's even questionable
that they know where they are after years of budget-busting neglect.
I doubt that there is any viable policy to raise oil supplies
quickly. I've read of two policy instruments with regard to the
housing bubble (which must have raised energy demands over time as
houses have become bigger and sprawls have extended commutes, so it
has medium-term energy implications).
<blockquote>What lifts asset prices, Mr. Bernanke and others argue,
is the willingness of lenders to offer riskier types of loans, which
"juice up the housing market and are not very responsive to interest
rates," as Mark Zandi, chief economist at the research firm
Economy.com, put it.
Lenders can engage in riskier loans because they have developed
techniques in recent years that make it far easier for them to shed
their vulnerability to risk, doing so mainly by shifting the risk of
default to others. The lenders operate in sophisticated markets that
allow thousands of individual investors to purchase a slice of the
original loan, and a slice of the risk.
In the past, the danger of default as rates rose tended to discourage
lenders from making overly risky loans. The lender, often a bank,
kept the loan and bore all the risk. Mr. Bernanke, in response to the
risk shifting, has raised the possibility of limiting the dangers
through the use of regulations - microregulatory policy, he calls it.
"There are two ways to approach bubbles: one is interest rate policy,
the other is microregulatory policy," he said in a little noted
interview published last year by the Federal Reserve Bank of
Minneapolis. "Microregulatory policy is the much better approach, in
my view," Mr. Bernanke said.
Pursuing his point, he added: "Research on historical episodes
suggests that large asset price increases are sometimes preceded by
credit booms. In many cases, this pattern results from the fact that
the country in question deregulated its banking system, giving banks
extra powers, but did not enhance the supervisory structure
adequately at the same time."
(Louis Uchitelle, "To Fight Rising Prices, Fed Nominee May Need New
Weapons," <http://www.nytimes.com/2005/11/04/business/04fed.html>)</
blockquote>
Cf. <http://federalreserve.gov/boarddocs/speeches/2002/20021015/
default.htm>
<blockquote>There are no cows more sacred in the tax code than the
deductions for mortgage interest and property taxes. Together, they
add up to at least a $75 billion annual subsidy for housing and
homeowners. President Bush, in establishing his advisory panel on tax
reform, specifically asked the group to preserve support for home
ownership.
So it was quite a shock that the panel, which released its final
report on Tuesday, concluded that it had no choice but to
significantly trim the home mortgage deduction and eliminate state
and local tax deductions if it wanted to find a way to simplify the
income tax.
. . . . .. . . . .. . . . .. . . . .
First, it would limit the amount of the mortgage eligible to be
deducted, cutting it from the current cap of a little more $1 million
to as low as $227,000 in cheaper housing markets like Springfield,
Ohio, to as high as $412,000 in places like New York and many of its
suburbs.
Second, families would receive a credit equal to 15 percent of the
interest paid on a mortgage below the cap, rather than a deduction
that can be worth as much as 35 percent for taxpayers at the high end
of the income scale.
Just about everybody involved in the housing and real estate market
has raised objections to this proposal. In a statement released
Monday, the National Association of Realtors estimated that home
prices across the nation would fall by 15 percent, with "a
devastating effect on the nation's housing economy." The Mortgage
Bankers Association called the proposals "a tax increase for a lot of
working Americans."
Even supporters of the changes acknowledge that house prices would
fall. "Almost any economic analysis will conclude that there will be
some downward effect on prices, especially at the top of the market,"
said James Poterba, an economist at the Massachusetts Institute of
Technology who is on the president's panel. "The question is how
large it will be."
The elimination of the deduction for state and local taxes, including
property taxes, also has the potential to bring down house values,
especially in high-tax states like New York, California and New
Jersey, where homes are selling at record-high prices.
(Eduardo Porter and David Leonhardt, "Goodbye, My Sweet Deduction,"
<http://www.nytimes.com/2005/11/03/business/03tax.html>)</blockquote>
The latter will be unpopular.
Yoshie Furuhashi
<http://montages.blogspot.com>
<http://monthlyreview.org>
<http://mrzine.org>
* Mahmoud Ahmadinejad: <http://montages.blogspot.com/2005/07/mahmoud-
ahmadinejads-face.html>; <http://montages.blogspot.com/2005/07/chvez-
congratulates-ahmadinejad.html>; <http://montages.blogspot.com/
2005/06/iranian-working-class-rejects.html>
