New York | Fed Chair Janet Yellen’s defense of the benefits of regulation last week in Jackson Hole probably killed her chances for reappointment, but the more pressing reason to see Yellen return to the private sector is visible in the US real estate market. Chair Yellen and her colleagues have created large bubbles in many assets classes from residential homes to commercial real estate to construction lending. As in the 2000s, this latest bout of asset price inflation will not end well for banks or investors.
In this issue, The Institutional Risk Analyst looks at the most recent bank portfolio data from the Federal Deposit Insurance Corp for Q2 2017 to see what it says about asset prices and inflation. For some quarters now, the credit statistics for the $16 trillion asset banking system has been too good to be true, in some cases suggesting that credit events have no cost. The last time that this circumstances existed was the mid-2000s, when several large mortgage banks were reporting a negative cost – that is, a profit – from default events.
The same real estate market dynamic that allows growing numbers of Americans to take cash out of their homes is depressing the cost of loan defaults to half century lows. Even faced with this rather striking situation, our faithful public servants on the Federal Open Market Committee can actually stand up in public and say that inflation is too low. The skews in the credit world are so large that some banks are actually earning a profit on recoveries after a loan balance is repaid in full.
This post was published at Wall Street Examiner on August 28, 2017.