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Peter Brimelow: Yawns greet gold''s euro move
From Reuters
Wednesday, June 15, 2005
http://www.reuters.com/financeQuoteCompanyNewsArticle.jhtml?
duid=mtfh70746_2005-06-15_12-35-26_wat003272_newsml
WASHINGTON -- Federal Reserve Governor Donald Kohn warned on
Wednesday that the U.S. current account deficit and surge in house
prices may not be sustainable and urged banks to shield themselves
against unlikely but potentially harmful events.
"Our economy is in unexplored territory in many respects," he said
in remarks prepared for delivery to the Bankers Association for
Finance and Trade and the Institute of International Bankers.
"The risk of rapid adjustments and unusual configurations of asset
price movements is higher than normal," he said in remarks to be
delivered in New York. A copy of the speech was made available in
Washington.
Kohn's comments echo stepped-up warnings from Fed officials,
including Chairman Alan Greenspan in recent weeks, that a swift rise
in U.S. real estate values may not last and may have led to
speculative behavior and risky lending practices.
Kohn said low long-term interest rates have fanned the four-year
U.S. housing boom, with home buyers rushing to take advantage of
historically cheap credit.
But he also said the Fed's focus on keeping inflation low may not
always maintain stable prices for some assets.
"Our capabilities are limited; ultimately we are working with only
the overnight interest rate and we concentrate on the price level
more generally, which may not always be compatible with the
stability of the prices of particular assets," he said.
Higher mortgage rates have long been expected to cool off housing
markets by raising interest payments for home buyers. However, Fed
officials have been at a loss to explain why a series of increases
in short-term rates has not yet pushed up long-term interest rates.
Kohn said he believes economic swings have been less dramatic since
the early 1980s, adding he expected a pattern of generally favorable
economic performance in coming years.
But the U.S. economy is now facing some "unusual imbalances," some
of which have been generated by economic strength, he said.
Americans buy more than they produce, and the current account
deficit has risen to more than 6 percent of the gross domestic
product, Kohn said. Americans save little, and their spending has
been spurred by the rapid rise in house prices -- a byproduct of low
interest rates, he said.
The growing deficit and climbing home values cannot continue
indefinitely, he said. Global investors will eventually seek higher
rates of return from dollar assets, and house price gains will slow
as they become disproportionate to incomes and rents, he said.
Kohn said he believes there will be an orderly adjustment to more
sustainable spending and saving patterns.
But even so, he urged banks to buffer themselves against unusual and
possibly extreme developments, known as "tail" events because they
are at the edges of the bell-shaped curve that analysts use to chart
the likelihood of their occurrence.
"We are in uncharted territory with respect to many aspects of our
macroeconomic environment. Prudent risk managers recognize the
potential for tail events and prepare for that possibility," Kohn
said.
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