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Daily Archives: December 8, 2010

Chanos on the building boom in China

Interview of Jim Chanos, who is one of the biggest short sellers on China’s real estate developers.

Fed’s inflated control

WSJ has a nice short piece questioning Fed's chairman's overconfidence.

Three things listed as the main limits for the Fed to raise interest rate when needed:
1) higher interest rate will hurt housing sector's recovery;

2) higher interest rate will make banking sector more vulnerable, as banks hold $2.4 trillion residential mortgage and $1 trillion mortgage backed securities;
3) slow recovery in labor market

Ben Bernanke would like to add something, beyond death and taxes, to life's short list of certainties: the ability of the Federal Reserve to quash inflation.

Speaking on "60 Minutes" on Sunday, the Fed's chairman declared he was "100%" confident the central bank could control an inflationary surge: "We could raise interest rates in 15 minutes if we have to. So there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time."

If only it were that easy. While the Fed has managed over the past few decades to keep inflation in check, in the future, its ability to choke off inflation through interest-rate rises could be constrained by fear of destabilizing still-weak property and banking sectors.

Any swift rise in interest rates, for example, could hit home prices again, in turn pressuring banks, which held about $2.4 trillion in residential mortgage debt at the end of the third quarter and more than $1 trillion in mortgage-backed securities. Also, stubbornly high unemployment could reduce the Fed's appetite to squeeze the economy.

Of course, Mr. Bernanke may speak with such conviction because he is certain any looming inflation won't be the sort the Fed cares about. While the Fed's $600 billion bond-buying program is spurring price rises in agricultural commodities, metals and energy, these aren't generally counted in the Fed's measure of "core" inflation. Core inflation would take time to emerge. And it should come from a strengthening economy, which would in theory be able to absorb higher rates.

It depends on your definition of inflation. But Mr. Bernanke, who infamously declared in a May 2007 speech that problems in the housing market would be "limited" to the subprime sector, should know better than to give blanket assurances.