The Fed’s Beige Book came out today. The key graf on the Boston District housing market: “Notwithstanding their reports of recent increases in activity, (real estate) contacts emphasize that activity levels in the region’s housing markets remain far from what they would characterize as ‘normal’ and they anticipate a lengthy recovery.”

Back in 2005 Federal Reserve Chairman Greenspan told us “there was a little froth in the real estate market.” Yet that was not what his economists were telling him at the time. The Federal Reserve has a 5 year moratorium on it’s meeting notes being released so we are now just being told the reality of the situation.

Instead of a little froth his economists were telling him that prices were overvalued by 20% at the time.

During 2005, the Fed raised interest rates a quarter-percentage point at every meeting, unwinding the ultra-loose policy it pursued earlier in the decade to address deflation worries after the 2001 recession. The economy at the time was growing at a healthy pace with few signs of overheating. But with reports across the U.S. indicating a bubble in the housing market, the Federal Open Market Committee spent time assessing the appreciation in home prices and what, if anything, the Fed could do about it. Fed staff economists had found that housing might be overvalued by as much as 20%, based on the historical relationship between prices and rents. via the WSJ

Michael Burry, who’s been made famous by Michael Lewis’s new book The Big Short, wrote an op-ed for the New York Times on Sunday, basically saying, I told you so. It’s just another assault on Greenspan’s legacy:

“ALAN GREENSPAN, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”

But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. My prediction was based on my research into the residential mortgage market and mortgage-backed securities. After studying the regulatory filings related to those securities, I waited for the lenders to offer the most risky mortgages conceivable to the least qualified buyers. I knew that would mark the beginning of the end of the housing bubble; it would mean that prices had risen — with the expansion of easy mortgage lending — as high as they could go.

I had begun to worry about the housing market back in 2003, when lenders first resurrected interest-only mortgages, loosening their credit standards to generate a greater volume of loans. Throughout 2004, I had watched as these mortgages were offered to more and more subprime borrowers — those with the weakest credit. The lenders generally then sold these risky loans to Wall Street to be packaged into mortgage-backed securities, thus passing along most of the risk. Increasingly, lenders concerned themselves more with the quantity of mortgages they sold than with their quality.

It only gets better worse from there . . .

From TIME Magazine: Person of the Year 2009 Extended Interview

TIME: Do you have a mortgage?

Bernanke: Oh, yes, we refinanced.

TIME: Oh, perfect. When?

Bernanke: About 5%. A couple of months ago.

TIME: Good time.

Bernanke: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.

TIME: So, did you get a fixed rate at 5%? I think this might be the most valuable piece of information. (Laughter.)

Bernanke: Thirty years fixed rate at a little over 5%.

Err … “little over 5%.” Mr Bernanke, my mortgage broker can get you a better deal than that. So, Mr. Bernanke has a mortgage? I wonder, does he have to call India like everyone else when he has a question?

Willem Buiter, Professor at the London School of Economics and Political Science, has a great critique of the Federal Reserve over at the Financial Times. Buiter says the Obama administration’s plans to enhance the Fed’s powers and turn it into the country’s systemic risk regulator spells trouble……. BIG TROUBLE. He writes:

If the same institution, the central bank, has to be in charge of both normal monetary policy and systemic risk regulation (albeit jointly with the Treasury for the systemic risk role), there is no elegant, first-best solution. Either monetary policy will be driven by politicians whose macroeconomics is limited to a partial understanding of the Keynesian cross and whose monetary policy views can be summarized by the proposition that the have never seen an official policy rate so low they would not want it even lower, or the central bank continues to act as an off-budget, off-balance sheet special purpose vehicle of the Treasury.

Buiter isn’t the only one calling for greater independence at the Fed. Over 350 economists signed a petition, which was sent to Congress today, urging lawmakers to “reaffirm their support for and defend the independence of the Federal Reserve System.”