Wednesday, April 20, 2005

Savings "Glut" Created Bubble: Bernanke

This story at Mineweb has comments from Federal Reserve Governor Ben Bernanke giving a "somewhat unconventional explanation" of the financial situation in the world, and a take on the housing bubble. "The key asset-price effects of the global saving glut appear to have occurred in the market for residential investment, as low mortgage rates have supported record levels of home construction and strong gains in housing prices."

The price boom, then is a result of a saving "glut". Huh? And this is the whiz kid that's going to run the Fed? His solution; the pace of savings "should slow".

When he talks about previous bubbles in global emerging markets (GEMs), you may think he is talking about the housing market in the US. "These capital inflows 'were not always productively used.' Indeed, in some cases, GEMs borrowed to avoid necessary fiscal consolidation 'opaque and poorly governed banking systems failed to allocate those funds to the projects promising the highest returns,' ultimately culminated in painful financial crises."

Will the US suffer the same fate? "The effects of these crises included rapid capital outflows, currency depreciation, sharp declines in domestic asset prices, weakened banking systems, and recession."

Don't miss the table at the bottom of the page.

22 Comments:

At 9:43 AM, Anonymous Anonymous said...

The housing bubble, like the dot-com boom before it, is a classic zero-sum game and has temporarily masked a mess of economic contradictions.
In the end,What will life be like in the U.S. after the home-equity ATM shuts down?
The second term of George W. Bush may hold some first-class Shakespearean surprises.

 
At 9:44 AM, Anonymous Anonymous said...

Bernanke is a quack. This moron actually said the Fed will drop money from helicopters if it has to. Sometimes, I think he really means it -- he is the Les Nessman of the Fed.

 
At 10:04 AM, Anonymous lee said...

If the housing boom is due to a savings glut, then why are people borrowing so much money and resorting to interest-only ARMs to squeeze into homes?

If they were so laden with cash, wouldn't they be paying larger down payments?

The most recent data I've seen shows US consumers saving at a rate under 1%. Japan is around 20%. China is about 30%. Europe is about 10-12%.

What could be happening is that the US is borrowing the savings of the rest of the world. Unsustainable Ponzi scheme that will result in serious global distress at some point when our creditors want their savings back and we won't have the money to give them. MBS default, anyone?

 
At 10:21 AM, Anonymous Anonymous said...

The "global savings glut" mantra that Bernanke is repeating on every occasion available to him must be making him the laughing stock of bankers everywhere. To know it is nonsense you just have to know the difference between savings and credit. It appears he does not.

Of course this is where Austrians meet head on with the Keynesian. Yes - asset prices will rise as future cash flow is discounted at lower interest rates. To decide if this is a permanent change or a temporary one we have to ask another question. Does the lower interest rate reflect a genuine higher savings rate or an artificial credit expansion. If the latter then it is inevitable that a bust will occur as wasted investment is revealed. The Austrians prove correct every time (1930's 1970's 1990's)

That lower IRs are a result of credit expansion is evident from many observations but perhaps most obviously from the trade deficit (which is just a symptom of it). As an aside it also means that the trade deficit and the falling dollar wont go away until after the mortgage extravanganza is stopped and a recession/depression induced.

For more errudite material on this go to

http://sage.typepad.com/weblog/2005/03/index.html#a0003971287

 
At 10:49 AM, Blogger realist said...

you may be laughing at bernanke, now, but he is probably the next fed chariman. bush is already working on elevating ben's status with this latest nomination. remember, he's the guy who said the fed can always be a buyer of long term treasuries once it had brought the short term notes to zero interest. bernanke will make greenspan look like a penny pincher. this bubble will probably be filled with a lot more hot air before it breaks.

 
At 10:50 AM, Anonymous Anonymous said...

Just to be clear...

Bernake is talking about a global savings glut, not a domestic one. If you go to his actual Federal Reserve speech, he lays it out.

The chain goes like this:

Japan has a very high savings rate - say 40%. They are not interested in investing in Japan, so they send the money to China. China has more money than it wants, so it goes and purchases US mortagage-backed securities. This pushes mortgage rates down in the US, people see that they can borrow huge amounts of money, they bid up the price of housing, and there you go - housing bubble. And of course, this leads to a lower savings rate in the US, and in the meantime, our trade deficit with Japan gets worse because the consumers are sending their cash to China instead of buying US products.

So it's all a big cycle.

If I don't have this right, please let me know - I'm not an economist.

 
At 10:51 AM, Blogger Sunny said...

global savings glut?--Sounds a little like grasping at straws.

I agree with above comments in that cartoonish, balloonish credit expansion has occurred in the U.S., savings rates are at all time lows domestically, MBS's are soon to lose their international investment luster because of rising and perhaps flooding defaults from overleveraged, overtaxed homeowners.

 
At 11:00 AM, Anonymous Anonymous said...

"this bubble will probably be filled with a lot more hot air before it breaks."

How exactly is Bernanke going to fill this bubble with more hot air? Lower short term rates some more, even though they are already very low to begin with? The Fed isn't going to be able to use this trick any more.

I appreciate your point of view but it seems like the Fed may be stuck in a stagflation scenario.

 
At 11:09 AM, Anonymous Anonymous said...

In matters international then there is still only one money. Gold. Money has to be a place marker for present goods, savings being forgone consumption.

What is in the reserves of the central bank of Japan and the central bank of China? Not gold but US treasuries. These are the future income of Americans not the forgone consumption (i.e. present goods) of their own Citizens. Hence the "global savings glut" is no such thing. It is glut of American credit. The fact that the treasuries can (and will) be defaulted on (either by devaluation or outright repudiation by a future generation) is further evidence that these are not savings. Gold cannot default.

As an aside it would be completely moral for a future generation to repudiate this debt. Why should they be left dealing with the consequences of the crimes committed by "quacks" like Bernanke.

It is no coincidence that China is encouraging its citizens to buy and save in gold.

 
At 11:17 AM, Blogger realist said...

"the fed isn't going to be able to use this trick anymore."

you didn't understand my post. bernanke said he would use a new trick. he said the fed could bring long term rates down by entering the market as a buyer of LONG TERM TREASURIES. greenspan refuted bernanke's speech a few weeks later in front of congress by saying that the fed had no plans to use such extraordinary measures. the long term rates spiked after that greenspan speech. bottom line: bernanke will make greenspan look like a tightwad.

 
At 11:23 AM, Anonymous Anonymous said...

This guy Bernanke is REALLY scary

 
At 11:24 AM, Anonymous Anonymous said...

"It is no coincidence that China is encouraging its citizens to buy and save in gold."

Show me any reference to this being the case.

In fact, you contradict yourself at the top. China is investing it's people's money in US treasury bonds, US mortage equities and other US securities. And if it ever stops, the dollar will drop relative to the yuan and all those US dollar-based assets are going to lose a lot of value - hundreds of billions.

 
At 11:31 AM, Anonymous Anonymous said...

Regardless of what you think of Bernanke, don't misquote him. The "helicopter money" thing is getting way out of hand; read the link below to find out what he actually said. You can also see he made the remarks about bringing short term rates to near zero and lowering long term rates in the context of how to handle deflation in a 1930's style great depression. Everyone should take half an hour to actually read the speech, which unlike Greenspeak, is actually comprehensible: http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

 
At 11:34 AM, Anonymous Anonymous said...

You can look it up for yourself. Can I suggest google as a start.

No contradiction. I don't conflate what the Chinese state is doing with what it is encouraging its citizens to do. It is clear that the chinese state is just playing games with US treasury non-savings. Meanwhile encouraging/permitting its citizens to accumulate gold.

 
At 11:44 AM, Blogger dryfly said...

Please somebody... stop them before they kill again...

 
At 11:53 AM, Blogger dryfly said...

Oh and blaming the Chinese 'for saving too much' instead of blaming Americans for 'borrowing too much' is EXACTLY why the Chinese elected to go fishing instead of going to the last G7, 8, 9 whatever, Club Meeting recently...

And frankly I don't disagree with their logic... Like being the only bonifide tea totter at an AA meeting and then being lectured by a US delegation who has just shown up with a case of scotch...

 
At 12:07 PM, Anonymous Anonymous said...

Who said anything about blame? I never said that it was their fault that this is happening, just that it's a economic chain of events leading from A to B.

After all, it's not only US home buyers that are going nuts, there are tons of Japanese, Chinese, European, Middle Eastern, Latin American, etc. investing in condos because they're cheaper than what they can buy at home due to the weak dollar. They're going to lose their money just like everyone else.

And whether it's a smart thing or not for China to be buying all this debt up.... If I had a business about to go bankrupt and you (China) comes up to me and loan me $800B at a low interest rate, you tell me who's the stupid one?

 
At 12:12 PM, Anonymous Billy The Kid said...

That was hilarious dryfly! LOL

 
At 12:42 PM, Blogger John Law said...

("It is no coincidence that China is encouraging its citizens to buy and save in gold.")

I don't have the articles, but the gov't is making it easier to buy gold and silver.

is there a savings glut...yes. but only because we spend so much money. I think some nations could spend more money, but I don't think that's really where the pressure should be. we should be thankful they fund our deficits.

The real change needs to come on our end. we can't be borrowing so much money. some of those countries have older populations, so it's no wonder they have a lot of savings. they are supposed to. the boomers in this country don't have enough saved. imagine the shock to the US economy if we went from the 2% we have saved now to 10%? I'd like to have the problem of having too much saved instead of too little.

 
At 2:15 PM, Anonymous Anonymous said...

A general question regarding savings...

Any thoughts on preferred method of savings in the current environment: ST Treasuries, FDIC insured MM accounts, holding cash as in Federal Reserve Notes in a shoe box, precious metals or some combination of all the above?

Comments appreciated!

 
At 3:47 PM, Anonymous Anonymous said...

I'm holding about 10% physical gold and the rest in money market accounts at a strong local bank (they received an A+ from Weiss ratings, for whatever that's worth). The dollar's long-term prospects are of course lousy, but for now the Fed appears to be sincere about draining liquidity and thus propping the dollar up (though the markets still seem to be betting otherwise). The May FOMC meeting may give us the eagerly-anticipated half-point Fed Funds rate hike, which is looking like it would coincide with the dollar hitting the bottom of its 2005 uptrend (and giving it an excuse to reverse upward again). Just my guess.

 
At 10:20 PM, Anonymous Anonymous said...

Bernanke should be put away in a psychiatric institute. There are rumours that he will be the next FED chairman. A glut of savings !!!!! This guy is insane. The Federal Reserve is a nut house. Quicl quick has anybody a stray jacket for Bernanke ? I really think this guy suffers from psychotic hallucinations.

 

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