A speech on housing by the Fed’s William Poole made the rounds this week. I thought I’d link to it because it clearly illustrates a point that I think is crucial to always keep in mind: that the folks at the Federal Reserve are politicians first and economists second.

Let’s jump right in with this line from his speech:

In practice, there is no perfect definition of a price bubble; so, identifying a bubble in real-time is inherently a judgmental exercise. Indeed, given that bubbles always burst—if there is no burst, then there was no bubble—clear advance evidence of a bubble can never exist. If the evidence were clear, then everyone would know about the bubble and forthcoming burst, but then the buying that created the bubble would not occur in the first place.

This is a ridiculous argument, because everything in economics is a "judgmental exercise." We need go no further than the last paragraph of his speech for an example:

My hunch, though, is that housing activity will stabilize and remain at a high level this year. I base this forecast on the belief that the FOMC will keep underlying inflation low and stable, and that the growth of real household income will recover nicely due to the waning influence of last year’s spike in energy prices. Continued healthy job growth will also help keep housing conditions at a high level.

Let me see if I have this. Poole has no problem telling us—based on a "hunch," apparently—what will happen in the next year for housing activity, inflation, energy prices, incomes, and jobs. So predicting post-bubble home price correction is an "inherently judgemental exercise," but predicting housing activity is not (as long as the prediction is positive, anyway). It’s also not a judgmental exercise to predict interest rates, energy prices, or job and income growth–despite the fact that these topics are all hotly debated in the financial press.

This is a complete contradiction, and it’s nonsense. The fact is that speculative bubbles absolutely can be identified as they are occurring. And the Fed knows it. They knew about the tech stock bubble, as Fed meeting notes have now shown, and they know that there are (at least) regionalized housing bubbles right now. Poole again:

The conventional view, which I subscribe to, is that a housing price bubble does not exist on a national average basis, but there may be pockets of the country where prices have risen beyond levels that can be justified by economic fundamentals.

Wait a minute—I thought you couldn’t tell if something was a bubble in real time? So how is he so convinced that there is not a national housing bubble right now? Per the claim above (which I disagree with, obviously) that a bubble turns out to have been a bubble only if it bursts after the fact, he shouldn’t be able to make that claim.

He then goes on to say that there "may be pockets of the country where prices have risen beyond levels that can be justified by economic fundamentals." Wait a minute; that kind of sounds like a bubble. So now he’s saying that he is able to identify bubbles, but only regionally? Oh, wait… there "may" be regional bubbles. Maybe he should look into that.

So in conclusion, you can’t tell if a bubble is taking place until after the fact, but you can tell when a big bubble isn’t taking place, and when little bubbles may be taking place. Thanks for clearing that up, Bill.

The whole speech is an exercise in double talk and double standards. It’s clearly intended to soothe housing bubble fears and to talk up the economy while throwing in vague references that there "may" be regional bubble for CYA purposes. I think the speech entirely without merit, except to prove the point I made above: Federal Reserve members are economists by training, but they are politicians by trade. Their economic commentary should be regarded accordingly.