Did Bernanke Forget That Buying Houses For “Return” Is What Got Us Into This Mess In The First Place?

Quantitative Easing blah blah blah blah blah.

Whatever.

What kills me is Bernanke’s statements in the Q&A from the press conference following the FOMC announcement today.  Now, we all know that the Fed’s mission with QE is to re-flate asset prices and generate trickle-down wealth effects and attempted real economic effects from quantitative easing – which has little/no economic impact on its own – but these housing comments are especially disturbing, emphasis mine:

“For example, the prices of homes.  To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend.  If home prices are rising they may feel more may be more willing to buy home because they think they’ll make a better return on that purchase.  So house prices is one vehicle.”

Ummm, yeah.  Wait – didn’t we JUST go through the biggest financial crisis of several generations, driven by reckless greed in the housing market and the desire for any and all parties to profit from “return” on housing?    Don’t answer that – it’s a rhetorical question – the answer is YES.   We had a massive housing bubble because people were buying homes (or leveraging their homes) for “return,” or “profit” instead of “to live in.”

For now the market has a massive QErection™ , but we’re really just blowing another bubble.  Awwww f*ck it – we’ll deal with that later, right?  As former Citibank CEO Chuck Prince famously said before the housing market imploded:

“As long as the music is playing you’ve got to get up and dance.”

We’ll worry about reality later.  In the future… for now?  Bernanke wants you to dance.

I think that Cullen Roche at Pragmatic Capitalism has refined his analysis of QE so that he really has it nailed now (tangent: I spent a lot of time about a year ago “arguing” with Cullen in the comments of his own blog about the “psychological” effects of QE, even if there is no real effect.  My point was simply that investors and money managers are not perfectly rational beings, and that when you take away investing options/returns – which is what the Fed is basically doing when it makes bonds “un-ownable” due to the terrible yields – you push capital into other risk asset classes: the Fed’s goal.   I think that Cullen knew this at the time, but he has “refined” his message to convey it much better than he had originally, in my opinion).   His two posts today on the subject are must reads:

1) QE3 – A Brief Analysis

2) A Disturbing Look Inside The Mind of Ben Bernanke

-KD

postscript:

I asked a colleague today: “Isn’t it terrifying? The way Bernanke specifically mentions housing as a profit engine?”

He replied: “In a few years probably, I’m fine with appreciation right now.”

 

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