20 Oct 2008

Robert Wenzel: The Man, The Myth, The Legend

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Free Advice readers may wonder who the heck this Robert Wenzel guy is, perhaps the only person mentioned more than 5 times on this blog whom I am not mocking. Well, over at the second best blog in the world, RW and I went head-to-head over some trivial issue. (In retrospect, I think we both lost that argument. And to avoid confusion, he had a slightly altered name, just like David Banner would do in the TV series.)

Eventually RW linked to his own blog, and I took a look. To be honest, I was underwhelmed. In the 8 seconds I devoted to the initial survey, I thought he was just pasting in news about financial markets from other sources. What was worse, he often wouldn’t provide links! Sort of like the guy who hooks his friends up with small doses of heroin but doesn’t ever say who his supplier is.

Well, I am now happy / ashamed to report that I completely underestimated Robert Wenzel in my initial survey. (Sometimes the opposite happens.) Assuming you believe that the following is true–and I’m about 98% there myself–I think you will agree that Wenzel’s site is one to check often, typos notwithstanding.

Last July Wenzel explained that it was ridiculous to expect the Fed to police financial markets going forward, because the smarty-pants Fed economists didn’t even recognize the housing bubble as such before it popped. To prove this, Wenzel points to a 2004 paper [pdf] by Jonathan McCarthy and Richard W. Peach, titled “Is There A Bubble in The Housing Market Now?”

You can guess what their answer was. Their reasoning was that the fundamentals justified the rising price of houses–in particular, interest rates were really low. (!!)

Now what’s really great is that Wenzel wrote a rebuttal at the time, which included this great paragraph:

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.

Hang on, the story gets better. Peach read Wenzel’s article and incorporated the money quote into his Power Point, with the slide titled, “A dissenting view”:

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 Wenzel says, they probably aren’t using that Power Point slide anymore. (Incidentally, here is their whole presentation, if you’re curious.)

One last thing: If you follow the links above, you’ll see that it’s not “Robert Wenzel” but rather “Raymond Sabat” who penned the prescient critique. Wenzel explains that this is because of his sensitive work commitments at the time.

I can totally empathize. By the same token, during 2006 I became very concerned about the prospects for the dollar, and wrote a book (which came out in early 2007) urging Americans to protect themselves. But at the time I was working in the financial sector, so I couldn’t use my real name.

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