Monday, June 28, 2010

The Fed In Panic

Below I reprodouce a report from Tyler Durden, where he writes of a second-tier Fed economist, Kartik Athreya, who has published a paper advising the general public to avoid blogger comments on the economy and to pay attention to only those with PhDs.

Now, although Athreay is just a second tier Fed grunt, it is highly likely he has put to paper the mumblings of senior Fed officials he has heard. Grunts don't wander far off the reservation.

Bottom line, the Fed appears to fear they are losing the propaganda campaign. The Fed generally tends to simply ignore the blogsphere. In fact, the only other known recognition of the blogsphere by the Fed was when they, much more subtly, attacked me. They still haven't lived down the blowback from that episode.

In 2004, New York Federal Reserve economists Jonathan McCarthy and Richard W. Peach wrote a paper Are Home Prices the Next Bubble? Of course, there was a bubble and I argued so, against their findings. Their absurd conclusion was based on ruling out lower interest rates as a cause of a bubble because interest rates were a "fundamental factor." I went off on them:
...the record climb in housing prices is, indeed, a bubble... the Federal Reserve study fails to consider past declining interest rates as a cause of the bubble. The faulty conclusions reached by Federal Reserve economists Jonathan McCarthy and Richard W. Peach may make many potential new home buyers comfortable about a purchase, when, in fact, we are very near the top of a housing market that will experience substantial declines in prices...

They reach the conclusion that because of ....[the] "fundamental factor" of low nominal interest rates, higher housing prices are justified.

But does this mean real estate prices will not drop? Our answer is decidedly no. Indeed, McCarthy-Peach report that "since 1995, real home prices have increased about 36 percent, roughly double the increase of previous home price booms in the late 1970's and late 1980''s." We view this increase as largely the result of the Federal Reserve's lowering of interest rates and the pumping of liquidity into the banking system, thus producing the byproduct of higher housing prices. But by incorporating falling nominal interest rates as a "fundamental factor" that can not be a cause of a bubble, McCarthy-Peach have literally defined the cause of the current bubble from being taken into consideration....

Further, the current structure of many mortgage loans whereby no money down is acceptable and/or adjustable rate mortgages are popular, sets up the possibility that many may walk away from current mortgage commitments down the road as interest rates begin to climb. Indeed, as ARM's rates become more and more burdensome and as housing prices begin to decline, walk away situations are likely to become quite prevalent, thus adding even more downward pressure to the housing market.

It is our conclusion, then, that by defining nominal interest rates as a fundamental factor and not as the Fed induced causal factor of the real estate boom, and by completely ignoring the structural features of current mortgage loans, McCarthy and Peach have blinded themselves to the real estate bubble that does exist. They have set themselves up for perhaps making the worst economic prediction since Irving Fisher declared in 1929, just prior to the stock market crash, that "stocks prices have reached what looks to be a permanently high plateau."
Now what is sweet about the event is that not only is there proof that McCarthy and Peach read my critique, but they got such a kick out of it that in a power point presentation ,when they went around the country declaring there was no housing bubble, under the headline Opposing View, they would flash a slide with this quote from me:
The faulty analysis by Federal Reserve economists McCarthy and Peach may go down in financial history as the greatest forecasting error since Irving Fisher declared in 1929, just prior to the stock market crash, that stocks prices looked to be at a permanently high plateau.
As I have said before, I'm sure it got a chuckle at the time.

So in the only known direct battle between bloggers and the Fed. It's Bloggers 1 - Fed 0.

And now we have one,  Kartik Athreya, telling the world that bloggers should be ignored because the topic is much too complex.

Whenever anyone has ever told me something was too complex, there was usually a scam around the corner, as indeed it is with the Fed. The Fed is, itself, a scam. The complex matter in which they carry on is done to obfuscate the scam. The blogger world is uncovering the scam and that is what is making Athreya and the rest of the Fed nervous. The Fed is losing the ability to cover it up.

The word about Ron Paul, the audit the Fed movement, and the End the Fed movement were spread by bloggers and the like. Athreya knows this. He wishes it were different. He prefers word coming down from him and his Fed  buddies only, that way when the next bubble is blown, they can tell us all, in a very complex manner, that there is no bubble.

Not a chance Athreya. Audit the Fed! End the Fed!


  1. Bob, The following article was written five or so years ago. Perhaps it may be of interest.

    More recent observations and analysis of the Fed's operation and Annual report are dispersed.

  2. For those who still do not understand what makes the FED a scam, there is a short / free book available here:

  3. And don't forget the Feds newly published comic book . Inflation for Dummies ( uh ...the public that buys the ponzi and the fuzzy Keynesian math)