Inquiring minds have been asking for another housing update. My previous update was was on February 15,2008 in Housing Bottom Nowhere in Sight. I did not remember Bernanke's comments at the time but looking back now they sure seem funny.



CNBC is reporting Bernanke Expects Housing Recovery by Year End.



Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday he expects the downtrodden U.S. housing sector to improve by the end of the year, a senator who participated in the closed-door meeting said.



"He let us believe that the housing situation should begin to ameliorate by the end of the year," said Sen. Pete Domenici, a New Mexico Republican, told reporters.

Flashback March 26 2005

Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that "South Florida is working off of a totally new economic model than any of us have ever experienced in the past." He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.





"I just don't think we have what it takes to prick the bubble," said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90's. "I don't think prices are going to fall, and I don't think they're even going to be flat."





Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership. "It is a new paradigm" he said.

Flashback October 27, 2005

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.



U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

What The US Can Learn From Japan

Click On Any Chart In The Set For Sharper Image

Exhibit 1. US Housing Price Futures Moving Closer to the Japanese Experience

Exhibit 4. Cumulative Capital Losses on Shares and Land since 1990 Reached $15 Trillion or 3 Years Worth of Japan’s GDP

Exhibit 5. Balance Sheet Problems Forced Japanese Businesses to Pay Down Debt even with Zero Interest Rates

Exhibit 6. Japan’s GDP Grew even after Massive Loss of Wealth and Private Sector Rushing to Pay Down Debt

Exhibit 23. US Interest Rates Took 30 Years to Return to Their 1920s Level

Balance Sheets and Paying Down Debt

The lessons of Japan's stumbling path out of deflation and recession suggest that government spending can help stave off an extended recession, but it may take years not months and require an unlikely combination of political will and consensus.



That'll be a lot of bridges to nowhere.



Government spending can break the cycle. Not tax cuts, which will only go to pay down debt or are saved into a banking system that isn't working, but actual bricks and mortar. Think the New Deal's Works Progress Administration supersized or Japan building highways and bridges over seemingly every river, stream and rivulet.



"It was the fiscal stimulus that actually helped end the Great Depression, not the monetary policy," said Richard Koo, Tokyo-based chief economist at Nomura Research Institute and author of The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession.



"I don't think it will be over quickly. I am recommending at least three to five years seamless medium-term fiscal stimulus measures to give enough time for the private sector to repair its balance sheet."



Three to five years is an eternity in political life. It is an absolute sure thing that incoming President Barack Obama will design and implement a pretty chunky fiscal stimulus package even if President Bush does not pass one in his waning days in office. But think about how difficult it will be to maintain both the will and power to maintain a huge borrow and spend programme for several years.



Koo thinks that Japan, which was facing a far more serious destruction of assets, derailed its recovery with premature fiscal reform. "If we had known in advance that this kind of recession will never be over until private balance sheets are repaired and fiscal stimulus is needed to keep the economy growing, we could have done it in seven or eight years perhaps instead of 15," he said.



Near zero interest rates were ineffective in Japan because people and business refused to borrow, continuing to pay down debt to repair balance sheets that had been hurt badly by the fall in the value of assets like stock holdings and real estate.