ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Friday, August 26, 2005

Andrea Mitchell's Husband...

...has lost it.

US heading for house price crash, Greenspan tells buyers
By Graham Searjeant, Financial Editor

WALL STREET shuddered yesterday after Alan Greenspan, the United States’ central banker, warned American homebuyers that they risk a crash if they continue to drive property prices higher.

He said that the US house-price spiral had become an economic imbalance, threatening stability like the country’s trade gap or its budget deficit.

In a pre-retirement speech to fellow central bankers at Jackson Hole, Wyoming, Mr Greenspan said that people were investing in houses as if they were a one-way bet, not allowing for the risk of price falls. He said “history had not dealt kindly” with investors who kept ignoring risks.

The Federal Reserve Chairman’s warning, his strongest yet, sent share prices falling on Wall Street, at one point knocking 66 points off the Dow Jones industrial average. By the close the Dow had recovered to 10,397.30, down 53.30 points.

Traders said that Mr Greenspan’s comments were reminiscent of his 1996 inveighing against “irrational exuberance” on the stock market, for fear that a crash there would hit consumers and push the economy into recession. When the share price bubble finally burst, Mr Greenspan cut Federal interest rates to 1 per cent, triggering the flood of cheap loans for housing. He fears that rate increases set in train as the economy recovered could throw the housing market into reverse and suggested that the twin deficits would now restrict his room to manoeuvre if a house price downturn hit spending. Asset prices were, he complained, driving monetary policy more than ever before.

Last I checked, home prices wasn't part of the job description for the Chairman of the Federal Reserve. And nevermind the fact that there are two primary drivers of the current housing boom: 1) Greenspan's cuts in the Fed Funds rate which resulted in historic low interest rates; 2) Greenspan's continually signaling that he intends to raise the rates (despite few indications of significant inflation from our current economic growth), which is causing people to rush out and get in on the American Dream before Greenspan pulls the trigger.

Of course, trying to damp down growth in the stock market isn't in the Chairman's job description either... And as Larry Kudlow points out, when will the Fed start paying attention to market leading indicators, instead of looking at historical data or trying to track where the DOW is for any given day. We've had significant growth in the past decade without inflation not because of Greenspan's continuous increases in the fed funds rate.
As you know, the Fed and the IMF and their fellow travelers will gathered today at Jackson Hole, Wyoming. It's a scary thought. Like a tennis player grooving a bad backhand, a lot of mistaken monetary ideas may reappear in the beautiful Grand Tetons.

This apprehension about the current Fed leadership, and the general state of economic advice the federal government gets from other sources, maybe be the reason for the curious poll numbers, from our survey last night. When asked who they wanted to be the next Fed Chairman, 1103 viwers responded:

Lawrence Lindsey 15%
Glenn Hubbard 10%
Martin Feldstein 15%
Ben Bernanke 21%
Other 38%

Other being, as you can see, the clear winner. [all of the above options are "mainstream" or "inside the fed" candidates] Can I offer one suggestion to restore some confidence? Instead of housing bubbles, or economic growth, or unemployment, why can't the Fed just focus on domestic price stability by carefully watching real time commodity and financial indicators? Look through the front view windshield, not the rearview mirror. As Friedrich Hayek taught us decades ago, markets are smarter than all of us and our models. And forward-looking market prices are signaling the Fed to take a breather from their tightening.

This commenter on Larry's blog has it right:
Looks like Jurassic Park has ID'd the housing market as the next candidate for his bubble pin. He warns that history has not dealt kindly with such problems. That's true, if you start recording history in 1987--the year his series of rate hikes produced a one day stock decline of about 23% in October. And you can just smell his uncontrolled desire to fine-tune, adjust, fix and tamper. Once agin, AG looks like the problem, not the solution--some things never change. Get the hook for this sonofabitch, January can't come fast enough.

Your Co-Conspirator,
ARC: St Wendeler