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Fed’s Bullard: Enlightening on Housing and Economy

Posted by Larry Doyle on June 22, 2012 9:52 AM |

James Bullard I love people who speak the truth.

Regrettably, speaking the truth today is an increasingly rare commodity in our nation and on the global economic landscape. Given that reality, unbiased and bold truth telling hits me like a rush of adrenaline on a cool, crisp morning.

I got just such a rush listening to Bloomberg today as Tom Keene interviewed St. Louis Fed President Jim Bullard.

For those who care to learn and understand what is going on in our global economy, this interview was truly enlightening.

Let me give you the painful but brutal truth as to why our economic recovery is going to take so long. Bullard recently wrote,

“Recovery from this point  is ongoing and will ultimately take many years. In particular households are saddled with too much mortgage debt compared with historical norms.”

Stating the obvious, you may think. Stick with me.

How much is too much mortgage debt? Bullard maintains the answer to that question is $3.7 TRILLION.

Be mindful that massive figure represents approximately 25% of our nation’s annual GDP. How is that number derived? Bullard lays out that the overall loan to value ratio of the U.S. housing market is currently between 90-95% against a historical norm of approximately 60%. That differential is a cool $3.7 trillion.

How long will it take American homeowners to pay down their mortgage debt to levels approaching historical norms? Bullard asserts it will take from 7 to 15 years.

Thus, while housing affordability is exceptionally attractive currently, the market is not going to get away from potential buyers who are truly being “paid to wait.”

Aside from housing, Bullard highlighted the fact that the extraordinary measures the Fed has taken to support the economy have distorted overall levels of interest rates and their impact on the economy beyond what models would otherwise project.

In regard to the Fed undertaking another round of quantitative easing, Bullard put forth that the hurdle for that undertaking is high and the risk to the Fed’s balance sheet has increased. If the Fed were to pursue more QE, it would further put our central bank into uncharted waters.

What does this all mean? Bullard concludes that a 2% level of overall growth for our nation’s economy might be as good as we can expect for the foreseeable future. How we might generate real job growth in the face of that underwhelming level of growth is the great $64 ZILLION question.

Not exactly a pretty picture but the cold slap in the face with a heavy dose of the truth was decidedly refreshing compared to the drivel put forth by many — dare I say most — on the political and economic stumps.

For those who would care to view the 13 minute interview, I welcome sharing it.


As always. . . keep your head up and navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • fred


    Honesty and truthfulness are refreshing, but so is incite into the ‘bigger picture’.

    Mr. Bullard refers to the real estate loan to value ratio as being too high while also stating that affordability has never been better, what am I missing here?

    For a possible answer, let’s add some additional historical perspective; In the past, the value of a home was about 3 X household income. With current household income aprox $50,000, the average price of a home would need to drop to about $150,000 to reach historic income affordability levels.

    The LT rate chart presented in the video clip tells the whole story, the Fed initiated a low interest rate policy in the early 1980s that has endured until today.

    Affordabilty has been fueled by below market interest rates while current affordability is only good in the context of ZIRP. Realistically, if rates were to rise, real estate would probably continue to decline toward historical norms more reflective of income.

    Maybe banks have been reluctant to underwrite new mortgages because they know that eventually rates are destined to go higher and under new regulation they may be forced to assume some of the interest rate risk.

    When the Fed subtituted below market interest rate policy for income in the real estate valuation equation in the 1980’s, it also created a bubble economy reliant on ever increasing housing prices that relied on ever decreasing interest rates.

    Some more historical context, back in 1919 the Fed was given a single mandate ‘to keep money valuable and our financial system healthy’. How have they been doing?

    It wasn’t until the introduction of Keynsianism in the late 1930’s that the Fed became more involved in the management of our economy. The Fed mandate was expanded to include both ‘moderate inflation and full employment’. It wasn’t until the 1980’s that the Fed began to grasp the enormity of its Keynsian power when interest rates and inflation finally began to moderate.

    Sure reported inflation has moderated but maybe that was because higher wages were not needed to purchase a home and that imputed rent, rather than prices, reflected the housing component of a modified CPI. Our cozy relationship with Saudi Arabia didn’t hurt headline CPI either, after the gas lines and price spikes of the 1970’s oil prices had nowhere to go but down!

    In corporate America, with lower reported CPI, labor cost of living increases were smaller allowing margins to fuel profit growth rather than price increases.

    Employment expanded in response to housing demand adding sales, construction, and service jobs. Public employment expanded apace as increased demand for utilities and public services was only matched by rising property tax receipts.

    Don’t worry, be happy. Right?

    Fast forward to today, we are quickly moving toward the Keynsian endpoint where even a small increase in rates hampers our ability to service our debt. If CPI is allowed to move higher, what happens to housing affordability and subsequent wage demands?

    Have we become addicted to QE and low rates, just as a heroine addict to heroine. The drug dealer is always the most popular person in the neighborhood, interesting that in today’s economy we have elevated the Fed to ‘rock star status’.

    Our financial and economic ‘choices’ have not gone unnoticed by foreign creditors. China recently requested, and was granted primary dealership status without the responsibilities of purchase and sale. Quietly, China, along with other nations including, Japan, Russia, India, Brazil, etc. have established non dollar currency swap agreements just waiting to be activated.

    When foreign creditors begin to transact in alternative currencies, what happens to their desire to purchase and hold our debt? What happens to the level of interest rates? What happens to the real estate affordability index? What happens to the value of our currency? To our cost of living, to America’s status as a global super power?

    • LD

      Wow. You present a wealth of great historical points, riveting perspectives, and insightful questions.

      Simply in regard to housing affordability, here is a friendly definition:

      Definition of ‘Affordability Index’
      A measure of a population’s ability to afford to purchase a particular item, such as a house, indexed to the population’s income. An affordability index uses the value of 100 to represent the position of someone earning a population’s median income, with values above 100 indicating that an item is less likely to be affordable and values below 100 indicating that an item is more affordable.

      On the other fronts, as Bullard lays out and you further hammer home, we have become addicted to the Fed’s liquidity. After 4 plus years of the drug, it packs less and less of a punch. Consumers and investors remain stressed and we are a LONG way from this nightmare being over.

      Thanks for the great comment.

    • Huckleberry

      I agree with a lot of what you said. I am not a “Keynesian.” But I would like to point out the following.

      From 1812 to 1914 there were severe economic downturns roughly every twenty year. By my count, five: 1815, 1837, 1857, 1873, 1893 (and arguably 1907).

      Excluding 1920-21, the period from 1914 to 2012 has seen two severe downturns 1929 and 2007-2008 that even come close in terms of wealth destruction (three is you want to count 1973-1975 and the inflation that followed). Only one of these, 2007-2008, (two if you count 1970s) can be honestly laid at the feet of “Keynesianism.” And much of what was done by Greenspan and is being called “Keynesianism” would have been rejected by Keynes himself.

      • fred


        I love your comment and I agree with it totally.

        The problem, to me isn’t Keynesianism, the problem is how and when Keynesianism is being utilized by our political and monetary leaders, furthermore, a ‘Keynesian mentality’ has taken over our pyche, (big gov’t will solve all our problems).

        Let me explain. Simplictically speaking, I believe the strength of this country is free market capitalism in conjunction with a government that realizes this, regulates this, enforces this and tries to stay out of the way of this, whenever possible. Our government should be no bigger than it has to be to fulfill its function within this context and certainly should not be in the business of picking winners and losers within the economy.

        For Keynesian policy initiatives to be most effective, Keynesian spending levels should be reflective of surpluses in good times and deficits in bad times.

        The focus should not be on creating gov’t jobs but on providing necessary services at the lowest cost possible. Keynseianism should be used to stimulate the private sector not to crowd it out, Evidence of Keynseianism should only emerge in times of crisis and all but disappear in periods of economic expansion. Effective gov’t policy should evidenced by expanding private payrolls.

        By extension, in my opinion, Keynesianism is evident in monetary policy when the Fed eases and tightens. Again, below market interest rate policy should only be an enacted Keynseian tool in times of crisis not expansion. Time and time again, in the last half century, this has not been the case.

        Economic and monetary micromanagement by our government, as measured by our national debt to gdp ratio, has proven to be ineffective and has brought us to the brink of catastrophe.

        Why do we persist?

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