Not My Fault Gov!

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Sorry if already posted.

http://www.dailyreckoning.co.uk/article/101020062.html

Alan Greenspan and the US house price bubble

...Speaking to a private audience [Alan Greenspan] said that the US house price bubble - and incipient bust - were not his fault...

Bill Bonner - Other articles

Tue 10 Oct, 2006

Boo hoo!

We were missing that old fraudster, Alan Greenspan. What

had become of him, we were wondering. The wisest,

wiliest, most powerful human being on the planet seemed

to have gone dark after he left his post at the Fed. We

thought we'd never hear from him again.

But yesterday, the man surfaced like a beluga whale in

Canada. Speaking to a private audience he said that the

US house price bubble - and incipient bust - were not

his fault.

"I don't think that the boom came from a 1 per cent Fed

funds rate or from the Fed's easing. It came from the

collapse of the Berlin Wall," Mr Greenspan told his

listeners.

The Financial Times reports:

"The former Fed chairman said the collapse of Communism

in eastern Europe and the shift towards more market-

based economies in China and other parts of the

developing world brought 'billions of cheap labourers

onto the scene".

"This he said, 'brought disinflation and lowered

inflation risk premiums and long-term interest rates,

creating a decline in real interest rates and equity-

risk premiums." In consequence, "the real market value

of assets increased faster than GDP".

There is undoubtedly some truth to what Greenspan says.

But this is one of those occasions for which the word

'disingenuous' must have been invented. Yes, global

integration probably has reduced inflation expectations,

thus permitting lower interest rates and higher asset

values. But without the active aiding and abetting of

the Fed, which set the Fed Funds rate under 2% - ie,

below inflation - for 35 months, the US boom in housing

prices would probably never have turned into a bubble.

And millions of Americans would still be solvent today.

Globalization may have lowered inflation rates,

permitting lower interest rates. But globalization

didn't bring with it lending rates below the rate of

inflation. Those negative lending rates were not imposed

by Mr Market, but by Mr Market Manager Greenspan.

A negative lending rate is a marvel. It allows a

speculator to borrow, knowing that he can repay less

than he was lent. Negative lending is to the financial

world what a negative-calorie dessert would be to Sara

Lee or a negative-year prison sentence would be to a

bank robber. You can imagine, dear reader, what mischief

they would cause.

Even at low real rates of interest, a borrower has to be

careful. But what kind of care is needed when you are

guaranteed to make a profit, merely by borrowing?

The actual effect of the Fed's sub 2% rate is now

history - well, a history that is still being written -

one painful page at a time. That it brought about a huge

bubble in US housing prices is beyond question. It also

helped sustain the whole US economy and, by extension,

the economy of the whole world. Goldman Sachs calculates

that since 2002, American homeowners have been able to

"take out" enough money from their houses to add 2.5% a

year to real GDP growth – which was most of it.

And now, it appears that the bubble is deflating. The

Fed is no longer giving away money. And the housing

market is no longer bestowing big gains on homeowners.

The granite countertop business is slowing down, along

with the rest of the housing-manufacturing complex.

If Mr Greenspan were right, investors could expect high

asset prices for a long time. Global trade, after all,

is not likely to disappear any time soon. Why should

house prices go down then? Or stock prices, for that

matter?

But now, even the Maestro concedes house prices are

going down. Only, he says, it is because houses have

become unaffordable. And he guesses that the worst of

the housing slump is already behind us.

And who knows? He could be right. But an investor has to

play the odds. What are the odds of making serious gains

in stocks at today's record prices? What are the odds of

making serious gains in houses in the US? What are the

odds that Mr Greenspan knows better?

We wait to find out.

Regards,

Bill Bonner

The Daily Reckoning

[Guest Shedfish]

there's some scary stuff on there -

Why are the US stock and bond markets rising?

http://www.dailyreckoning.co.uk/article/101020061.html

Expanding debt

http://www.dailyreckoning.co.uk/article/050920061.html