Sunday, March 08, 2009

Flashback 2005: Bernanke on housing and consumer debt

Here are two nuggets from Ben Bernanke's congressional testimony before Joint Economic Committee at the peak of the housing bubble. The first one comes from testimony he gave exactly four years ago today:

March 8, 2005:
Some observers have expressed concern about rising levels of household debt, and we at the Federal Reserve follow these developments closely. However, concerns about debt growth should be allayed by the fact that household assets (particularly housing wealth) have risen even more quickly than household liabilities. Indeed, the ratio of household net worth to household income has been rising smartly and currently stands at 5.4, well above its long-run average of about 4.8. With real disposable income having risen over the past few quarters, most consumers are in good financial shape—a positive indication for household spending. One caveat for the future is that the recent rapid escalation in house prices—11 percent in 2004, according to the repeat-transactions index constructed by the Office of Federal Housing Enterprise Oversight—is unlikely to continue. A plausible scenario is that house prices will either move sideways or rise more slowly during the next few years, eventually bringing the rate of return on housing in line with the relatively low prospective rates of return that we currently observe on virtually all assets, both real and financial. If the increases in house prices begin to moderate as expected, the resulting slowdown in household wealth accumulation should lead ultimately to somewhat slower growth in consumer spending.
October 20, 2005:
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas. House prices are unlikely to continue rising at current rates. However, as reflected in many private-sector forecasts such as the Blue Chip forecast mentioned earlier, a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.
The Washington Post has a blast from the past here.


  1. Looking at data is great, but underlying problems are in the nuts & bolts of any industry.

    Any sophisticated real estate professional (there aren't many) knew things were not right.

    Fed Chairman was too far removed from the problem.

  2. Neither I nor most of my friends have anything to do with Real Estate or Financial Markets. All of as just watched the home prices go thru the roof to the point were most of us would not be able to afford homes we were currently living in. We watched in astonishment how professionals - RE agents, experienced mortgage brokers and govt officials kept singing the same song and wondered to ourselves - how is the possible? Everyone must have gone mad! That was back in 2004. The madness continued for more than a year still, almost convincing us that madness was new normalcy. I think the problem with the professionals was that they were looking at the numbers, charts and graphs and made their predictions based on the mathematical models. But math does not account for madness, greed, fear and general insanity...