In the middle of March I had an inkling that all was not well with my thinking. My thinking was that the market would pullback and that the global economy would slow down. Well I was wrong, and in the referenced blog entry I talked about what my head told me, and what my gut was telling me. It seems that my gut was telling me the right thing. As a result I have become a bear in bull’s clothing. This means I grudgingly accept the bull rally, but I don’t like it one bit!

The problem is inflation and getting it under control. Yes we can argue about how to measure inflation, but the reality is that there is inflation and I see it everyday in our pocket books. Low inflation, or virtually no inflation is good for the economy because it keeps the economy efficient. I had a gut feeling that Bernake was an inflation dove and cared more about the well being of the individual people.


Consider the following quote from his speech he gave today.

The expansion of subprime mortgage lending has made homeownership possible for households that in the past might not have qualified for a mortgage and has thereby contributed to the rise in the homeownership rate since the mid-1990s.  In 2006, 69 percent of households owned their homes; in 1995, 65 percent did.  The increase in homeownership has been broadly based, but minority households and households in lower-income census tracts have recorded some of the largest gains in percentage terms.  Not only the new homeowners but also their communities have benefited from these trends.  Studies point to various ways in which homeownership helps strengthen neighborhoods.  For example, homeowners are more likely than renters to maintain their properties and to participate in civic organizations.  Homeownership has also helped many families build wealth, and accumulated home equity may serve as a financial reserve that can be tapped as needed at a lower cost than most other forms of credit.

Broader access to mortgage credit is not without its downside, however.  Not surprisingly, in light of their weaker credit histories and financial conditions, subprime borrowers face higher costs of borrowing than prime borrowers do and are more likely to default than prime borrowers are.  For borrowers, the consequences of defaulting can be severe–possibly including foreclosure, the loss of accumulated home equity, and reduced access to credit.  Their neighbors may suffer as well, as geographically concentrated foreclosures tend to reduce property values in the surrounding area.

As a central banker whether or not a community is doing better is not part of the job description. Getting people to stop renting and buy houses is not the role of a central banker. The role of a central banker is price stability and the economy. You can argue that America’s central bank is a bit different because there is also the goal of full employment, and future growth. Assuming that the Fed has that additional role I still can’t see how making sure that there are more home owners than renters fits into the role of a central banker.

So why would Bernake make such a comment? In my opinion he is a market socialist. He believes that he has a role to play for the good of American society regardless of how it impacts fiscal policy. There is nothing wrong with being a market socialist, so long as you are in the elected government. BUT Bernake is not in the elected government (please no technical arguments here, but I think you know what I am getting at). He is a central banker who is supposed to be the conservative voice in our economy. A central banker is the one who calms everyone down in the storm and has a steady hand.

What bothers me about his thinking are comments like the following:

Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.

Why not say, “inflation in wages will make it possible for people to pay for their too expensive houses.” The reason why we are in the mess is because there are realtors that make comments like the following.

Same payment with each scenario…except you’re able to buy $132,725 more home using a 40 year fixed over the 15 year fixed and  $107,750 more home with the 30 year fixed mortgage.

Christy, Seattle is not too pricey for normal people…your 15 year fixed mortgage is.

The real estate broker was advising people to buy more expensive houses so that their dollar would stretch further even though the people who the comment was directed at did not want to overpay or go into debt until the end of time. This is the problem in a nutshell. People think in terms of cash flow and not in terms of overall debt. I have my cynical arguments why our society has become warped, but that is not part of this discussion.

Getting back to Bernake’s comments, Bernake then went on quite a bit on how lending was loose and that more rules are necessary. Oh, is that not interesting, sounds like market socialism YET AGAIN.

The core problem is that it seems people like Bernake are trying to fight the business cycle or stock market pullbacks. As the book Business Cycles says in the epilogue.

“So what have you found out – I mean about business cycles.”

“No cure. But interesting. You can modify the fluctuations, but it is impossible to avoid them completely. If you try that, then they will just get worse.”

I grew up in Canada, in middle Ontario where people hunted and trapped to earn a living. I had a few friends who were trappers and knew how to camp in the winter. Their motto is to never fight Mother Nature because you will always loose. Same for business cycles or the market and that’s why I am a bear in bull’s clothing.

I found the following post interesting regarding when we could have a pullback.