January 14, 2006

Another great article in the Economist. How should Mr Bernanke respond to falling house prices and a sharp economic slowdown when they come?


I continue to be impressed with the foresight and writing in the Economist. The Harvard MBA class of 2012 will be too, when they're working on their paper on the 2000 - 2005 Housing Bubble. Here's a highlight:

When house-price rises flatten off, and therefore the room for further equity withdrawal dries up, consumer spending will stumble. Given that consumer spending and residential construction have accounted for 90% of GDP growth in recent years, it is hard to see how this can occur without a sharp slowdown in the economy.

How should Mr Bernanke respond to falling house prices and a sharp economic slowdown when they come? While he is even more opposed than Mr Greenspan to the idea of restraining asset-price bubbles, he seems just as keen to slash interest rates when bubbles burst to prevent a downturn. He is likely to continue the current asymmetric policy of never raising interest rates to curb rising asset prices, but always cutting rates after prices fall. This is dangerous as it encourages excessive risk taking and allows the imbalances to grow ever larger, making the eventual correction even worse. If the imbalances are to unwind, America needs to accept a period in which domestic demand grows more slowly than output.

16 comments:

Wes D said...

I also get the Economist. Aside from their obvious bias towards the United States and especially strong spite for George Bush, their articles are insightful if you can remove the bullshit.

They have done a good job on reporting on the housing bubble because the local media seems to have their lips attached to the asses of the National Association of Realtors and other housing groups who have a vested interest in seeing the current boom continue at the detriment of the rest of us.

Anonymous said...

Hey what can I say most of the world hates "W" me included.

Anonymous said...

To Moman: As for me, I only want to read magazines that are biased towards United States. I don’t really care what the magazines in Canada, France, or Germany are saying.

When housing rolls over, Alan Greenspan will be the whipping boy that many will blame. There was no reason for him to pump this much liquidity into the economy. I read somewhere that the money supply increased world wide by 20% in 2003, and another 20% in 2004. The only factor that kept inflation from being worse than reported was cheap goods from China and India.

Anonymous said...

off topic a bit...

but the remarkable thing is that the economist endorsed George Bush the first time, and only endorsed Kerry with "a heavy heart" as they put it.

Really shows how (some) fiscal conservatives are disappointed with Bush.

Anonymous said...

off topic a bit...

but the remarkable thing is that the economist endorsed George Bush the first time, and only endorsed Kerry the second time with "a heavy heart" as they put it.

Really shows how (some) fiscal conservatives are disappointed with Bush.

Anonymous said...

(Keith - go ahead and delete this as many times as you want.....I have a program that just re-instates this post automatically if you delete it.....just requires me to push a button......you can't hide from the truth)

Keith b.....Any of this ring a bell?


"Short all homebuilding, mortgage lender, PMI insurance and real estate
stocks"

"Sell everything except oil stocks"

"Short homebuilders, lenders, Fannie and Freddie, home furnishing retailers
and mortgage insurance companies"

"If/when FRE and FNM are limited - their stocks will plummet -Short 'em"

"One play that I do recommend is EBAY - why? Because the interest only crowd
will be selling everything that's not bolted down to make their payments
(until they're foreclosed) the next few years"

"So I'm cautious with 40% of my assets in 4% savings, 20% in COP, and 40% in
stocks and mutuals"

"HousingPanic Buy Recommendation: SRPIX - ProFunds Short Real Estate Fund"

and finally (my favorite)......

$5000 - 4% interest savings at HSBC
$1000 - short FNM
$1000 - short TOL
$1000 - short TGIC
$1000 - short SPF
$1000 - long COP

Wes D said...

Oops, I should have written The Economist has a bias against the United States.

277.18 Hz said...

To anon 11:09 am -

He should delete your post because you're not contributing to the discussion.

Anonymous said...

Hey Anonymous,

It’s easy to play a nameless Monday morning quarterback. But it’s difficult to time an irrational housing market. As for the corporate homebuilders; we all know what is going to happen to them. At least Keith has the balls to not hide in the corner like you.

Why don’t you F.O.!!!!!

F ……… O!

Anonymous said...

I agree....it sure is tough to time the housing market....you guys have been trying to time it seriously for hte past six years, and not so seriously for the past 63 years (only once in the past 63 years has housing gone down).

Just keep on renting - you are paying off my mortgages on my rental properties.

Anonymous said...

anonymous,
If you've got it all figured out and you're raking it in, why are you so cranky?

DrChaos said...

I am a subscriber to _The Economist_.

It is by far the best English-language news periodical in the planet.

They also have an obvious position and ideology---they are a clearly conservative and very pro-capitalist British publication.

However, they still believe in quaint things like "facts" and "truth", which means that they call BS when they see it. And right now, that means the BushAdm's economic policies.

They are what *used to be* mainstream Republican economics.

If they argue against the US's administration, it's really because they think the US has gone absolutely nuts. And it has.

Wes D said...

It is by far the best English-language news periodical in the planet.

In my world that designation goes to Business Week. The Economist is a close second.

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