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The Prescience of Ben Bernanke

By Matthew Yglesias  

"The Prescience of Ben Bernanke"

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I thought I’d look into some of Ben Bernanke’s writing from back when he was heading up George W. Bush’s Council of Economic Advisers. For example, the 2006 Economic Report of the President which assures us that “Financial services facilitate innovation and thus encourage economic growth. They might also bolster economic stability.”

Sweet, sweet stability.

On pages 30 and 31 he discusses his view that the United States can’t be in a housing bubble because lots of other countries are also in a housing bubble:

To gauge the extent to which house price increases have reflected fundamentals, some studies compare housing prices to rents. The rent-to-price ratio is a real rate of return on housing assets in the same way that the earnings-to-price ratio measures the real rate of return on corporate stocks. Viewed as an asset, a home should bear a real return similar to the real return available on alternative assets, such as stocks and bonds. As real interest rates have fallen in the United States and in most other Organization for Economic Cooperation and Development (OECD) countries, the rent-to-price ratio for housing has likewise fallen across a broad range of OECD countries. A recent OECD paper concluded that the decline in the rent-to-price ratio in the United States from 2000 through 2004 was roughly consistent with the decline in interest rates over the same period.

This led up to the conclusion that “During the next fiveyears, the Administration expects the pace of home-building to decrease gradually because of demographic trends and slowly rising long-term interest rates.”

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