 It's Not Our
Fault
Peter Schiff
Jan 8, 2010
It seems that the primary qualification
needed by any chairman of the Federal Reserve is the ability
to never admit error, no matter how damning the evidence. During
his tenure on the job, Alan Greenspan set the standard for implausible
deniability. But in a speech last weekend in Atlanta, current
chairman Ben Bernanke did the Maestro one better. In a tortured
academic dissertation, Bernanke explicitly denied any Fed
culpability for inflating the housing bubble and for the financial
crisis that began when it burst. Despite his best efforts,
no one seemed particularly convinced. By taking such an
absurd stand, he has destroyed any credibility he may have
had left.
In his presentation to the National Economic
Club, Bernanke claimed that ultra-low interest rates in
the early Bush years were appropriate given
the conditions at the time, and that they therefore did
not contribute to the housing bubble. Instead,
he laid blame squarely at the feet of an "under-regulated"
financial sector which had designed and sold unconventional and
exotic mortgage products, such as adjustable-rate and interest-only
mortgages. According to Ben, it was these irresponsible lenders
(who he now hopes to regulate), not low interest rates, that
caused the housing bubble.
There are two huge flaws in this line
of reasoning. First, if these mortgages were such a problem,
why didn't the Fed do something to rein in their use? When given
an opportunity to speak about the widespread use of ARMs in congressional
testimony, former chairman Greenspan had nothing but praise for
these products. He claimed these offerings allowed savvy homebuyers
to save money and better manage their personal balance sheets. At
the time that Greenspan made these statements, Bernanke
was serving as a Fed governor. From neither that position
nor his later role as chairman of President Bush's Council of
Economic Advisors did Bernanke ever utter a scornful phrase
about the mortgages he now condemns in hindsight.
The biggest issuers and insurers of ARMs
were Fannie Mae and Freddie Mac. Both of these Government
Sponsored Entities (GSEs) had policies that
allowed for borrowers to qualify based solely on their ability
to meet the initial loan payments, not the higher
payments that would eventually kick in. Why didn't the Fed advise
Congress to force the GSEs to adopt more prudent standards? Either
they did not recognize these mortgages as problematic, in which
case they are incompetent, or they did and remained silent, which
is worse. In either case, if they lacked the foresight or
political will to prevent this crisis, how can we expect them
to protect us from the next?
Furthermore, is it really possible that
Bernanke is so clueless that he does not see the relationship
between the proliferation of ARMs and interest-only mortgages
and the low short-term interest rates that made them so popular? Without
the ultra-low interest rates provided by the Fed, the vast majority
of these problem mortgages never would have been originated. ARMs
and interest-only mortgages existed well before the housing
bubble began; however, it wasn't until the Fed cut rates
to historically low levels in 2002, and held them there
through 2005, that they became so popular.
The only reason so many people were able
to overpay for houses was because of the temporarily low "introductory"
rates. Had the Fed not set interest rates so low, these
options would not have been available, and house prices would
have been held in check. In short, by keeping interest rates
too low, the Fed inflated the housing bubble by enabling
banks to issue mortgages that made overpriced houses seem
affordable.
Bernanke also blames lenders for making
the false assumption that real estate prices would always rise. However,
he neglects to point out that he made the very same mistake. While
it is true that many lenders did make this foolish assumption,
they did so under the influence of all the cheap money supplied
by the Fed. Had they not made so many trips to the Fed's
punch bowl, they would have exercised much better judgment. However,
the Fed itself can make no such excuse.
As proof that the Fed caused the housing
bubble, I offer a commentary that I wrote in May of 2004 and
which was published as an opinion piece in the Orange County
Register.
Let me reproduce some key quotes:
"That so many are currently opting
for ARMs reflects a level of real estate speculation unparalleled
in American history. Homebuyers have been lured into this foolish
choice by... a Fed chairman desperate to keep the real estate
bubble inflating. Unfortunately, the longer the Fed remains
"patient" with regard to raising short-term interest
rates to appropriate levels, the more homeowners that will be
lured into the ARM time bomb.
"The real losers in this whole
fiasco are likely to be those who did not even participate in
the mania. As over-leveraged borrowers walk away from properties
in which they have no equity, the Fed will most likely attempt
to bail out both debtors and bank depositors (and the government
sponsored enterprises that insured the loans) with the most inflationary
monetary policy ever undertaken in the history of central banking.
The savings of an entire generation will be wiped out, as it
will have been squandered to perpetuate the biggest real estate
and consumer debt bubbles of all time."
Now if I could have seen that coming
as early as May 2004, why couldn't the Fed? Even with the full
benefit of hindsight, Bernanke still cannot recognize the Fed's
mistakes. Of course, as there is a campaign underway
to expand the Fed's regulatory authority, anyone expecting
an honest assessment from its chairman and chief lobbyist simply
does not understand politics.
While denying the obvious, Bernanke
is now pursuing an even more reckless monetary policy than the
one that created the housing bubble. The consequences this
time will be even more devastating, and you can take that to
the bank.
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Jan 8, 2010
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
Archives
 Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
321gold Ltd
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