Tuesday, October 19, 2004

Greenspan Desperate?

The latest Fedspeak is that Greenspan sees no distortion in the housing prices.

U.S. Federal Reserve Chairman Alan Greenspan said Tuesday that he did not foresee big price distortions developing in home prices and said Americans were handling their debts well.

Speaking to America's Community Bankers, Greenspan conceded there were concerns about "the exceptional run-up in home prices" but said hefty debt burdens seemed to be under control, provided that incomes and home prices did not tumble.

This while central banks in different countries like Britain with comparable prie run-ups have issued cautions. It shows you how truly insidious and widespread the favortism has spread - not a favoritism for Bush particularly but favoring the candidate that will prolong the status quo.

In a previous comment, a reader of mine commented about gas prices so I decided to post a link to inflation-adjusted historical gas prices. Of course Republicans aren't the only ones willing to manipulate markets in order to get a hoped-for political gain. Just as Bush agreed to dip into the Strategic Oil reserve so did Clinton in a late summer attempt to moderate gas-prices and assist a Gore campaign.

My take is that Greenspan isn't so much trying to help Bush as he simply is attempting to "keep a lid on things". By denying the incipient but not yet undeniably obvious, Greenspan is attempting to delay market adjustments to new realities. He is in the common parlance attempting to buy time.

I am somewhat sympathetic to this point of view since I attempted to buy a decade of time myself before on a more personal level, but the whole logic behind buying time is that sometimes by delaying issues you can formulate a better response. In other words you try to hold out until the calvary can ride in and rescue you and slaughter the indignant displaced indigenous peoples. In cases where there is no white knight that will rescue you, buying time is often counter-productive in the end.

I could understand Greenspan trying to buy time, but what is he trying to buy time for? For Bernacke to consolidate his hold and take over? For Iraq to straighten out and oil prices to drop and the historical Fed Funds and inflation adjusted oil price to realign once more? What is he holding on hoping for?

Otherwise his actions would be to me bespeak the smell of desperation. Only the desperate hold out as long as they possibly can, trying to get that one crucial break that will bail them out. Of course, statistically speaking, such hold outs do not when historically considered often escape their fate.

36 Comments:

At October 19, 2004 at 8:36 PM, Anonymous Anonymous said...

Here in So. CA there is already signs of a price peak, some real estate agents I know have said houses are not moving at the current prices.

Gas is selling at $2.35 a gallon BTW.

FWIW
Rodger

 
At October 20, 2004 at 12:29 AM, Anonymous Anonymous said...

Rodger: Here in the "Silicon Valley", that is pretty much where it starts.

 
At October 20, 2004 at 9:10 AM, Blogger Ed Tayter said...

I see several reasons why Greenspan may want to buy time.

1. Greenspan hopes that buy buying time, the American equity market will firm up sufficiently to take on some of the debt load that is currently being born by housing consumers. When the housing bubble pops there will be a large number of mortgage defaults that will put serious pressure on the holders of the defaulting mortgage (large banks who have bought bundled mortgages through Fannie and Freddie), who just happen to be Greenspans constituency. If there is no one to cushion the default blow, one or more of the major US creditors could tank. Greenspan could be buying time to let corporate America remake itself as the white knight.

2. Greenspan is worried that pricking the housing bubble will precipitate major collapse in the economy. He is genuinely being far sighted and looking at the potential damage that a lame duck Bush administration fix could cause. Greenspan is hoping that Kerry can take office before the housing bubble pops and put in a technocratically competent economic team.

3. There is no other game in town. What else is Greenspan going to do. Let the good times roll till they can't roll no more.

(1) is a best case scenario that is pretty unlikely to materialize, but it sure would be nice from Greenspan's point of view.

(2) doesn't seem particularly likely either based on some of Greenspan's other moves that look like they are designed to get Bushco another 4 years in November.

(3) seems like the most probable.

What do you think?

 
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