Is Our Fed Governors Learning?

The Fed releases the minutes of its monetary policy meetings on a six-year delay so as to avoid accountability ensure its independence. And boy oh boy should the participants in this 2004 discussion of whether there’s a housing bubble be glad that there’s no way to hold them accountable. It all started when someone showed up with this somewhat unusual chart trying to highlight the divergence between rental costs and ownership costs for housing:


There are a number of qualms one can raise with this chart, including the scaling of the y-axes, the fact that I don’t know why they think the Treasury yield is relevant to this, and the fact that you normally express the ratio the other way ’round. Like Annie Lowrey, I prefer this chart from Calculated Risk:


Either way, though, the charts are showing the same thing—the cost of buying a home is rising relative to the cost of renting a home. Which is to say that the value of owning a home was growing faster than the income you could generate by renting the home out. Which is to say that a speculative bubble was under way.

But instead of focusing in on that fact, the discussion winds up involving a huge degree of irrelevant nitpicking. There are complaints about the chart. Someone raises the issue that the data on buy prices and rent prices come from different sources, so they’re allegedly not comparable (a standard that would make it hard to compare anything). Donald Kohn, wildly overoptimistic, says “[e]ggs will get broken when rates begin to rise, but the capital in most intermediaries is high, and the system is resilient” which makes him one of the least overoptimistic people in the room.

Calculated Risk highlights this curious June2004 comment from Stephen Oliner, the Associate Director of Research:

I don’t want to leave the impression that we think there’s a huge housing bubble. We believe a lot of the rise in house prices is rooted in fundamentals. But even after you account for the fundamentals, there’s a part of the increase that is hard to explain.

What would a bubble be if not an increase that is hard to explain after you account for the fundamentals? Now recall that this all went down only a few months after Alan Greenspan—who at the time was the most highly respected figure in American economic policy, treated with extreme deference by the press and by politicians—told people ARMs were a great deal and people should be getting more of them.