The Fed sees bubbles -- and keeps them secret

moneycentral.msn.com ^ | 3/14/2005 | Bill Fleckenstein

[Destro]

The Fed sees bubbles -- and keeps them secret

In public, the Federal Reserve says there's no housing bubble. But the Fed also said there was no stock market bubble in 1999. Behind closed doors, the governors knew there was.

By Bill Fleckenstein

Our Fed chairman has argued (most recently last October, in a speech to America’s Community Bankers Annual Convention) that for a variety of reasons, real estate cannot experience a bubble. Yet anyone with a pulse can see wild speculation taking place all around them.

At the height of the stock-market bubble in the first quarter of 2000, it was becoming progressively more difficult for me to adequately describe (in my daily column) the market action. So, in an attempt to capture the mood of the day, I began to share stories of insane behavior that were being e-mailed to me by regular readers. I dubbed this series "The Mania Chronicles," and you'll find excerpts from it in Chapter 3 of the Archives section of my Web site. (Readers of the Contrarian Chronicles can access the site for the next week by using the password/username: mania/mania.)

The kind of maniacal behavior that we saw then toward stocks and which we are seeing now in real estate tends to come at the end of a speculative mania. It is almost always coincident with rising supply, which helps to satiate the inflated demand.

As I have pointed out, the true danger in the real-estate bubble is that folks are often speculating with more than 100% leverage. When it all ends (and though we don't have a timeline for exactly when that will be), the banking system and other financial entities will be left with the bad assets, which will severely impact the economy.

[litehaus]

"What a moran."

MORAN-That's a REALLY idiot congressman,not a BS'ing financial anal-yst...LOL..

[glorgau]

Just to give an idea,
I was just talking with a woman in my office. She and her live-in boyfriend finally took the plunge and bought a condo in San Francisco by cashing in their IRAs and getting a 5 year adjustable rate interest only loan. No risk there... they'll just retire on the apprcciation.