A couple of years ago I was reading Treasury Secretary, Timothy Geithner’s Wikipedia Bio.(1) I was surprised to read that Mr. Geithner served as a Treasury Department Attaché in the U.S. Embassy in Tokyo, Japan during the early years of what has become known as “Japan’s Lost Decade” (A “Lost Decade” which is now approaching its second decade anniversary).(2)
It’s widely recognized that Japan’s “Lost Decade” was a consequence of the deflation of an asset bubble.* Since reading how Geithner was in a unique position to witness the formation and the consequences of a severe asset bubble, and because I believe he has no doubt followed the efforts of the Japanese Government to stimulate its way out of its economic doldrums, I’ve found Mr. Geithner’s policy positions a little strange.For me, the strangeness of Treasury Secretary Geithner’s policies took on an even more strange dimension this morning.This morning I was watching a video of a May 11, 2009 New Yorker Summit presentation of a conversation between Nassim Taleb, Robert Shiller(3) and Nick Paumgarten. At about 4.5 minutes into the video Robert Shiller describes how, after being on the New York Federal Reserve Bank’s “Academic Advisory Panel” for 14 years, Timothy Geithner ‘fired’ him (presumably for Shillers presentation to the panel on asset bubbles). Shiller’s ‘firing’ took place shortly after the first meeting of the "Academic Advisory Panel" after Geithner’s appointment as President of the New York Fed.* As much as most economists agree on anything, most economist’s attribute Japan’s “Lost Decade” to the [changed] wealth effect and loss of confidence which followed the late 80’s early ‘90’s bursting of the Japanese commercial real estate bubble, which had inflated excessively during the early-to-mid 1980’s.I copied the portion of the longer video in which Professor Shiller describes what he interpreted as being fired by Timothy Geithner. If you are interested, you can see the video clip here:The complete video of the May 11, 2009 New Yorker Summit discussion between Nassim Taleb, Robert Shiller and Nick Paumgarten can be found here:Footnotes:(1) Timothy Geithner - Wikipedia, the free encyclopedia, at: http://www.bing.com/search?setmkt=en-US&q=Timothy+Geithner+Wikipedia(2) Japan’s “Lost Decade” at: http://en.wikipedia.org/wiki/Lost_Decade_(Japan)and Japan announces “new dimension” in quantitative easing wsws.org Saturday 6th April, 2013, at:(3) Robert Shiller is an economics professor at Yale University. He is the author of a book Irrational Exuberance (published in 2000) which describes the role of excessive confidence in the development of economic bubbles. Professor Shiller expressed concern about the stock market bubble before that bubble burst bubble, and he was one of the earliest, if not the earliest, to warn us of the real estate bubble. He is co-developer of the S&P Case-Shiller Real Estate Price Indeces. [see, http://www.irrationalexuberance.com/definition.htm ]
Why is there a ‘shadow inventory’ of homes?
In last quarter of 2008, U.S. banks and their lobbyists pushed the U.S. Congress to force the Financial Accounting Standards Board (FASB) to postpone the implementation of mark-to-market accounting (FAS #157).* The FASB eventually acquiesced. So, after the acquiescence, banks and other collateralized mortgage obligation [CMO] investors can continue to carry these investments at origination value, rather than at the investment’s current market value.
But, if a bank or other mortgage investor forecloses, renegotiates the mortgage, or sells the home (the collateral) the new ‘book value’ of the investment is based upon the new selling price (or mortgage value) - as determined by the terms of the new deal (auction, renegotiation, or sale).
By not foreclosing, renegotiating, or formally taking back properties (REO) banks and other mortgage investors can, to some extent, manage what their losses appear to be, and hopefully offset the losses - they recognize - against other revenue, over time.
Key-words-search: “Congress Helped Banks Defang Key Rule” By Susan Pulliam & Tom McGinty WSJ 6/3/2009 | Professor Adam Levitin Congressional testimony “Federal Regulators Don’t Want to Know” YouTube | Zombie Banks | Japan Lost Decade (Please note that, at the beginning of Japan’s lost decade our current Treasury Secretary, Timothy Geithner was living and working in Japan as a Treasury Department attaché in the U.S. Embassy.)
* See, FAS #157 [mark-to-market accounting] and scroll down to the section heading: Effect on subprime crisis and Emergency Economic Stabilization Act of 2008 , at http://en.wikipedia.org/wiki/Mark-to-market_accounting
Federal Regulators Don't Want To Know