Posted on 08/29/2005 5:31:04 AM PDT by OESY
...Greenspan's two speeches here dwelt less on the successes of his 18-year tenure than on looming risks. As the world economy has become more stable, he suggested, investors have become complacent about risk.
"They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon," he said. This means they have bid up stock and housing prices and accepted unusually low yields on long-term bonds....
If investors suddenly turn cautious, asset prices and borrowing will plunge. "History has not dealt kindly with the aftermath of protracted periods" of investor complacency on risk, he warned.
Mr. Greenspan's cautious tone was markedly different from that in January 2004, when he last reflected at length on his tenure. At the time, the economy was emerging from its post-stock bubble torpor. The Fed's strategy of healing the economy with ultralow interest rates appeared to have been "successful," Mr. Greenspan told academics in San Diego then. Continued high levels of foreign and household debt were unlikely to trigger another recession, he asserted. As to new excesses, "We don't have to worry much about the emergence of bubbles for a while, because it takes a number of years for the trauma of the [last] collapse to wear off."
But events since then haven't unfolded quite as Mr. Greenspan expected. In contrast to previous expansions, economic growth in this one has depended inordinately on consumer-spending fueled by borrowing against soaring housing prices instead of on wage growth, trade and business investment. Housing has been buoyed by long-term interest rates that have remained unusually low despite increases in the short-term rates that the Fed controls. Meanwhile, personal saving has collapsed, and the trade deficit has widened, forcing the U.S. as a whole to borrow heavily from abroad....
(Excerpt) Read more at online.wsj.com ...
Are stock prices "bid up?"
Greenspan has outlived his usefulness. As an Ayn Rand ideologue once widely-respected, he has insultated hiself from contrary views by his FOMC picks. As a result, he has been unreliable in recognizing changes economic trends and slow in responding. For example, his complaint of "irrational exuberance" was uttered in December 1996 as the Dow approached 6500. The Dow went on to almost 12,000 in 2000, meaning that his call for investors to exit the stock market was woefully premature. Yet he continued to rail against dormant inflation and the "unfair" wealth effect. Greenspan appears to be crying "wolf" again as he addresses the national real estate market.
I have to agree with him about housing. The homes we live in are the same homes we lived in a few years ago. Why they should be worth more now is not clear.
Stocks are another matter. Some stocks are overvalued, but others have p/e ratios in the 10-15 range which, when discounted, implies a rate of return of between 6.5% and 10%. As long as they are producing income to back up their value, I don't know how Greenspan can say that they are overvalued.
Greenspan has all of this investments in bonds. Certainly that is his right, but most investors are willing to accept more risk in pursuit of greater returns. That is their right too.
Whether he is right or they are right, only time will tell.
The Fed Governors have openly admitted to manipulating the financial markets in an attempt to ruin the U.S. housing market. Should they succeed, they should be subject to criminal penalties and jail time. Bernie Ebbers cost investors around $8 billion, Greenspan & Co. could well cost Americans $1 trillion. Should they do so, they should be sent to prison.
Time for Mrs. Andrea Mitchell to get lost already.
While the market just about wiped out pensions, the real estate market made up for the losses.
One's home is a safer investment than the corrupt market the Rubin and his buddies presided over.
At the time it was. I'm not so sure that's the case now, though. Real estate is risky too.
I admit that if you look at history, you don't see too many instances where real estate actually went down--maybe in the late 80's and early 90's, and before that, in the 30's. On the other hand, those were times when our population was growing exponentially. It's not growing very fast right now, despite illegal immigration.
A lot of folks think that the fact that real estate values are downwardly rigid is good. Actually, the reason why they are downwardly rigid is that people tend to buy real estate on credit, and when they try to sell the property, they can't reduce the price very much without taking a loss on the mortgage. So they simply don't sell. But if you want to sell, and can't, that's often a bigger risk than the downward price risk on the stock market.
The market will take care of itself. It's the economy that is keeping people able to pay their mortgages. As always, if people are over extended, they will have foreclosures and the prices will go back to more normal levels.
Greenspan's been a great chief. He talks a lot without saying anything. He takes credit for the success of others while avoiding blame for his own failures. And above all he has created the illusion that government management is necessary for a successful economy.
As an Ayn Rand ideologue once widely-respected,...
Yes, and like any good objectivist, he puts his own welfare above all else, which explains how someone who was once a huge proponent of markets is now the world's biggest proponent of government control.
People should take note, because other than the Bretton Woods failure, the Federal Reserve has been the greatest source of economic instability over the past sixty years.
December 31st can't come a day too soon for Green-spam...
I wish he had never given up on the clarinet! LOL
There's only one sure way to tell if a stock is overvalued and that is hindsight. P/E's can work, but only for a fraction of estabished companies in low growth sectors, which make up less of our economy than they used to.
The Federal Reserve...where America trades prosperity for usury!
Greenspan's comments are hypocritical. He is famed for complaining about "irrational exuberance" in the stock market during the clinton dot.com bubble, but what did he do about it? Nothing. As soon as the market started to tumble, he pumped up the money supply to unheard of heights.
The same now. He complains about a housing bubble, but Fed policies continue to encourage the bubble. His words did not cause even a temporary decline in the market because past experience leads investors to believe that he doesn't mean it and will not do anything about it.
He will not, as his predecessor phrased it, do the Fed Chief's chief job, which is to remove the punch bowl at the height of the party.
"I have to agree with him about housing. The homes we live in are the same homes we lived in a few years ago. Why they should be worth more now is not clear."
"Supply and demand" and "price elasticity" and "substitution effect." When demand exceeds supply the price will rise based on the value that a consumer sees in the product, or else they will buy a substitute. A weak rental market and strong market in existing and new homes shows that that price has not yet met it's natural level.
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