As Fleckenstein says here, "exhaustion" finally has set in, and now the long way back down the ladder... time to take our medicine we should have taken in 2002.
"The 'use-your-house-as-an-ATM-to-live-beyond-your-means' stimulus is finished, thanks to the recent de-leveraging/crackup in the bond market. The refi game and the bull market in housing it created postponed the consequences of the largest stock market bubble in history. Though the Fed and the rest of the government succeeded in postponing the fallout from the massive misallocation of capital that took place in the mania, they have also succeeded in compounding and exacerbating those consequences. Even more leverage was created in the system, as we attempted to speculate our way to prosperity.
"In short, the excesses from the bubble have not been cleared away, but they will be, along with the recent excesses from the refi bubble … These developments will tend to be self-reinforcing, and especially damaging, if and when housing prices join the decline."
Exhaustion: built into a bubbleThe Federal Reserve precipitated, aided, abetted and cheered the largest (by dollar volume) stock mania in the history of the world. That mania exhausted itself in 2000. The exhaustion was not caused by the Fed tightening, contrary to what many folks believe, any more than the 1929 market break (and ensuing Great Depression) was caused by Fed tightening.
Manias end in exhaustion, though there are always coincident events surrounding the end of the move that get blamed for the decline. In both 2000 and 1929, higher interest rates were present, but they were not the cause. The preceding bubble was the cause of both the subsequent exhaustion and the ensuing bust.
July 31, 2006
The bills for the housing bubble and all the debt that's been run up in the last few years are coming due
Posted by blogger at 7/31/2006