Poor Ben... Alan pours the moonshine into the punch and throws a party of the likes we (or Gatsby) have never seen. Then Ben gets called in to clean the puke off the carpet... Whoever is unlucky enough to get elected President in 2008 will suffer the same fate I'm afraid, as GW Bush and Congress put off all the tough decisions save for Iraq onto the next administration (trade imbalance, social security, medicare, pensions, deficits, etc)
If Ben Bernanke is unlucky, he may inherit the whirlwind when he succeeds Alan Greenspan as Federal Reserve chairman early next year. The Greenspan Fed is once again pursuing a high-risk strategy while concealing its real intentions from the public: raising short-term interest rates in the name of fighting inflation, but actually aiming to defuse the price bubble in housing.
The last time the Fed tried this maneuver, it was hoping to subdue the stock market bubble. That gambit ended badly: shareholders lost $6 trillion, and instead of subsiding gently, the bubble collapsed and the economy went into recession.
This time, as sophisticated financial-market analysts understand, the Fed’s true objective is asset deflation—though neither Greenspan nor Bernanke will acknowledge even that a housing bubble exists. Raising short-term rates, the Fed assumes, will induce financial markets to raise rates on long-term loans like mortgages, and higher interest on mortgages would definitely dampen housing prices.
Trouble is, the Fed strategy has so far failed utterly.
December 12, 2005
Alan Greenspan popped the stock market bubble and threw the economy into recession. Will the new Fed chief do the same with the housing bubble?
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I don't know if the Fed can do anything about slowly deflating the housing bubble. I'm sure they will try, but whether or not they can succeed is something else. Not to mention that home builders themselves have find ways to manipulate their stocks so they can hold the stock price high even though it is obvious that demand has dampened and that 2006 will be a different year for home builders and housing market alike. Of course the Fed won't admit that there is a housing bubble until there is no way of denying it.
It hasn't failed utterly, it has failed tepidly. Greenspan didn't foresee the 80/20 Stated Income or NIV products to prop up inflated values. The correction has simply been deferred. May/June/July 06 should be interesting. Some harbor hope that the drop in activity and pricing concession is strictly seasonal.
And, I do wonder if the secondary market would rather be squeezed on tightened or no margins rather than increase rates for fear that doing so will expose the massive fraud in the industry.
I read in an article (I wish I had link) that while Bernanke does not acknowledge that a housing bubble exists, he says that he will raise and lower interest rates to regulate inflation and not asset prices. He said he would NOT stop raising interest rates to keep protect individual asset prices.
penny - I saw that too, and figured, heck, there goes housing. And he's serious - inflation is his thing, not asset prices
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