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The Fed: Dishonest or Incompetent?
by Eric Janszen
August 26, 2006
Today's Quick Comment notes the recent epiphany experienced by the mainstream press: the Fed has been lying about the housing bubble for years by claiming it didn't exist, just as it lied about the stock market bubble when Greenspan and company claimed that bubble didn't exist. Well, the mainstream press are not exactly stating that the Fed was lying. But they are running stories about the housing market that can only be true if the Fed had either been lying -- again -- or if the Fed was, collectively, dumber than a bag of hammers -- again.
You decide.
Get ready for a good six months of "It's just a house, stupid" stories like those below, reminiscent of the "There's no New Era, stupid" articles about tech stocks that came out of the mainstream press in 2001 a year after the collapse of the NASDAQ bubble and a basket case NASDAQ made it apparent that the bubble wasn't coming back. To wit:
It's important to note that during the tech stock bubble, the object of speculation was not the products that the high tech companies produced -- the computers, software and services -- but the securities that the companies issued. At the time, iTulip.com as a parody of a tech stock company made light of this by creating no products at all except bogus stock certificates, of which we sold hundreds. It's just as important to note that in the case of the housing bubble, products were built -- housing -- but again the object of speculation is not the house itself -- the product -- but the underlying security, the mortgage paper that is traded.
Anyone who was part of the high tech industry and lived through the aftermath of the collapse of the NASDAQ bubble can tell you how devastating the collapse was to the high tech industry. There is still debate on how badly the collapse of the housing bubble will hurt the US economy. My position is that the damage will be slower but more extreme and widespread because, as Greenspan himself noted, housing represents 70% of household wealth, consumption which accounts for 2/3 of economic actitivity is closely tied to housing, and housing generated between 20% and 43% of private sector employment since 2002, depending on whose statistics you believe. By contrast, stocks represented less than 20% of household wealth and the high tech industry itself represented less than 2% of economic activity at the peak of that bubble.
I doubt anyone seriously believes that the Fed did not see a housing bubble forming in nearly all regions of high population density around the US, creating from the standpoint of aggregate national economic impact a national housing bubble. Why did the Fed allow a housing bubble to form? A friend who runs a public company said it best, "Did they have a choice?" Meaning, the alternative following the stock market bubble collapse was a harsh recession, perhaps a deflationary depression like Japan's. I believe this is the reason, but still wonder, once the housing bubble got out of hand, why not at least speak to it publically and try to talk it down?
One theory is that the Fed has decided that it can no longer constructively engage asset bubbles once they are underway, that the Fed winds up doing more harm than good when it tries.
The last time the Fed moved actively to end an asset bubble and said so was in 1994. As discussed in The Bubble Cycle is Replacing the Business Cycle, Greenspan is quoted in the FOMC minutes saying, "When we moved on February 4th, I think our expectation was that we would prick the bubble in the equity markets." The results were less than delux, "...while this capital gains bubble in all financial assets had to come down, instead of the decline being concentrated in the stock area, it shifted over into the bond area. But the effects are the same. These are major capital losses, which have required very dramatic changes in the actions and activities on the part of individuals and institutions." He went on, "So the question is, having very consciously and purposely tried to break the bubble and upset the markets in order to sort of break the cocoon of capital gains speculation, we are now in a position—having done that and in a sense succeeded perhaps more than we had intended—to try to restore some degree of confidence in the System."
The Fed quickly reversed course in 1995 by changing reserve requirements and other rules as documented in What (Really) Happened in 1995? by Aaron Krowne.
Since then, you will find no mentioned of asset bubbles in any FOMC meeting notes, with the single exception of President of the Federal Reserve Bank of Boston, Cathy E. Minehan, saying during the June 4, 1999 meeting, "We recently held a meeting of the Bank's Academic Advisory Council which, as you all know, includes two or three Nobel Prize winners and people from Harvard, MIT, Yale, and so forth. The discussion focused on issues related to productivity growth, labor market tightness, and asset market bubbles. The group was lively, to say the least. But some consensus was reached on the need for action that might take the wind out of asset markets, even in the absence of tighter monetary policy, perhaps through increased margin requirements or increased supervisory oversight on credit extended, particularly in the day trading operations."
Nonetheless, the Fed did raise interest rates in 1999 and those rate hikes, by intent or not, did precipitate a collapse of the stock market bubble, and a series of 16 quarter point rate hikes up until last month have collapsed the housing bubble. The result will be worse than most expect.
Remember the pictures of tourists walking out onto the drained ocean floor before the Asian Tsunami hit in 2004? They were lured by the miracle of a surprising opportunity to walk out onto the exposed ocean floor. Fish flopped on the surface. All you had to do was reach out and pick them up.
Intuition might tell you, "Well, this can't been good. Whatever force has sucked the ocean away from the shore is probably going to send it crashing back in with equal positive force later." The sudden, peculiar appearance of the ocean floor that had for a thousand years been covered in 100 feet of ocean water says: head for higher ground. Those who failed to do so drown when the water surged back, and when it receded again it left heaps of destruction and human loss in its wake.
Asset bubbles are like tsunamis except they are man-made, out of money instead of water, and instead of lasting for a few minutes they last for years. They draw people in, lured by apparently risk-less money. Just bend over and pick it up. What iTulip.com has been telling you for eight years is this: when you see apparently risk-less money -- financial fish flopping on the bare ocean floor -- head for higher ground. If you have the means and the risk appetite, maybe grab a few fish first. But in any case, head for higher ground. Don't stay too long and financially drown.
During the stock market bubble, that meant heeding my warning to sell in March 2000 that the tech stock bubble was going to pop. In that case, you could run slowly to high ground, as stock markets are liquid and give you plenty of opportunities to exit. During the housing bubble, that meant heading my warning in 2004 that housing markets end by seizing up, and that you can get trapped, like the tourists on the beach. And I could not have been more explicit about how the collapse of the housing bubble was likely to unfold. (Apologies to long time readers for all this past history... this is for new members of our community.)
When the tsunami of money recedes it leaves behind heaps of economic destruction within the industry that is the focus of the bubble. The technology industry has never recovered from the collapse of the NASDAQ bubble. The real estate industry won't return to normalcy, that is, to grow at the rate of inflation, for ten years or more.
by Eric Janszen
August 26, 2006
Today's Quick Comment notes the recent epiphany experienced by the mainstream press: the Fed has been lying about the housing bubble for years by claiming it didn't exist, just as it lied about the stock market bubble when Greenspan and company claimed that bubble didn't exist. Well, the mainstream press are not exactly stating that the Fed was lying. But they are running stories about the housing market that can only be true if the Fed had either been lying -- again -- or if the Fed was, collectively, dumber than a bag of hammers -- again.
You decide.
Get ready for a good six months of "It's just a house, stupid" stories like those below, reminiscent of the "There's no New Era, stupid" articles about tech stocks that came out of the mainstream press in 2001 a year after the collapse of the NASDAQ bubble and a basket case NASDAQ made it apparent that the bubble wasn't coming back. To wit:
Forget the Mansion: Why Buying Bigger Doesn't Guarantee a Rich Retirement
August 25 2006 (Wall Street Journal Online)
It's among today's most popular retirement-savings strategies: Buy the big house, hope the real-estate boom continues and then trade down at retirement, thus freeing up home equity that will pay for years of early-bird specials.
Sound appealing? Trouble is, you will fork over a heap of dollars -- and you'll end up with a surprisingly small nest egg.
andAugust 25 2006 (Wall Street Journal Online)
It's among today's most popular retirement-savings strategies: Buy the big house, hope the real-estate boom continues and then trade down at retirement, thus freeing up home equity that will pay for years of early-bird specials.
Sound appealing? Trouble is, you will fork over a heap of dollars -- and you'll end up with a surprisingly small nest egg.
Getting real about the real estate bubble
August 25 2006 (Fortune)
Fortune's Shawn Tully dispels four myths about the future of home prices.
For the past five years, the housing bulls have been trotting out one rational-sounding argument after another to explain why the boom made perfect economic sense.
Forget about a crash, they assured homeowners. Expect a "soft landing" where your three-bedroom colonial in Larchmont or Larkspur not only holds onto its huge price gains, but keeps appreciating at a "normal," "sustainable" rate of 6 percent or so into the sunset.
Americans wanted to believe, and they did. Now, the giant popping noise you're hearing is the sound of yesterday's myths exploding like balloons pumped up with too much hot air.
Why do the common sense articles that dispel obvious bubble myths come out each time a bubble ends? The answer is that the publishing business becomes an unwitting participant, dependent on the advertising revenue generated by the companies that are the "producers" in asset bubbles, along with everyone else involved: the CEOs, management and employees of the companies that are "producing" the object of speculation; the banks that finance them; the lawmakers who rely on the capital gains tax revenues from sales of securities; and the industry of brokers, consultants, advisors and so on that grow up both to make money off the bubble and who act as boosters to re-enforce and perpetuate it. August 25 2006 (Fortune)
Fortune's Shawn Tully dispels four myths about the future of home prices.
For the past five years, the housing bulls have been trotting out one rational-sounding argument after another to explain why the boom made perfect economic sense.
Forget about a crash, they assured homeowners. Expect a "soft landing" where your three-bedroom colonial in Larchmont or Larkspur not only holds onto its huge price gains, but keeps appreciating at a "normal," "sustainable" rate of 6 percent or so into the sunset.
Americans wanted to believe, and they did. Now, the giant popping noise you're hearing is the sound of yesterday's myths exploding like balloons pumped up with too much hot air.
It's important to note that during the tech stock bubble, the object of speculation was not the products that the high tech companies produced -- the computers, software and services -- but the securities that the companies issued. At the time, iTulip.com as a parody of a tech stock company made light of this by creating no products at all except bogus stock certificates, of which we sold hundreds. It's just as important to note that in the case of the housing bubble, products were built -- housing -- but again the object of speculation is not the house itself -- the product -- but the underlying security, the mortgage paper that is traded.
Anyone who was part of the high tech industry and lived through the aftermath of the collapse of the NASDAQ bubble can tell you how devastating the collapse was to the high tech industry. There is still debate on how badly the collapse of the housing bubble will hurt the US economy. My position is that the damage will be slower but more extreme and widespread because, as Greenspan himself noted, housing represents 70% of household wealth, consumption which accounts for 2/3 of economic actitivity is closely tied to housing, and housing generated between 20% and 43% of private sector employment since 2002, depending on whose statistics you believe. By contrast, stocks represented less than 20% of household wealth and the high tech industry itself represented less than 2% of economic activity at the peak of that bubble.
I doubt anyone seriously believes that the Fed did not see a housing bubble forming in nearly all regions of high population density around the US, creating from the standpoint of aggregate national economic impact a national housing bubble. Why did the Fed allow a housing bubble to form? A friend who runs a public company said it best, "Did they have a choice?" Meaning, the alternative following the stock market bubble collapse was a harsh recession, perhaps a deflationary depression like Japan's. I believe this is the reason, but still wonder, once the housing bubble got out of hand, why not at least speak to it publically and try to talk it down?
One theory is that the Fed has decided that it can no longer constructively engage asset bubbles once they are underway, that the Fed winds up doing more harm than good when it tries.
The last time the Fed moved actively to end an asset bubble and said so was in 1994. As discussed in The Bubble Cycle is Replacing the Business Cycle, Greenspan is quoted in the FOMC minutes saying, "When we moved on February 4th, I think our expectation was that we would prick the bubble in the equity markets." The results were less than delux, "...while this capital gains bubble in all financial assets had to come down, instead of the decline being concentrated in the stock area, it shifted over into the bond area. But the effects are the same. These are major capital losses, which have required very dramatic changes in the actions and activities on the part of individuals and institutions." He went on, "So the question is, having very consciously and purposely tried to break the bubble and upset the markets in order to sort of break the cocoon of capital gains speculation, we are now in a position—having done that and in a sense succeeded perhaps more than we had intended—to try to restore some degree of confidence in the System."
The Fed quickly reversed course in 1995 by changing reserve requirements and other rules as documented in What (Really) Happened in 1995? by Aaron Krowne.
Since then, you will find no mentioned of asset bubbles in any FOMC meeting notes, with the single exception of President of the Federal Reserve Bank of Boston, Cathy E. Minehan, saying during the June 4, 1999 meeting, "We recently held a meeting of the Bank's Academic Advisory Council which, as you all know, includes two or three Nobel Prize winners and people from Harvard, MIT, Yale, and so forth. The discussion focused on issues related to productivity growth, labor market tightness, and asset market bubbles. The group was lively, to say the least. But some consensus was reached on the need for action that might take the wind out of asset markets, even in the absence of tighter monetary policy, perhaps through increased margin requirements or increased supervisory oversight on credit extended, particularly in the day trading operations."
Nonetheless, the Fed did raise interest rates in 1999 and those rate hikes, by intent or not, did precipitate a collapse of the stock market bubble, and a series of 16 quarter point rate hikes up until last month have collapsed the housing bubble. The result will be worse than most expect.
Remember the pictures of tourists walking out onto the drained ocean floor before the Asian Tsunami hit in 2004? They were lured by the miracle of a surprising opportunity to walk out onto the exposed ocean floor. Fish flopped on the surface. All you had to do was reach out and pick them up.
Intuition might tell you, "Well, this can't been good. Whatever force has sucked the ocean away from the shore is probably going to send it crashing back in with equal positive force later." The sudden, peculiar appearance of the ocean floor that had for a thousand years been covered in 100 feet of ocean water says: head for higher ground. Those who failed to do so drown when the water surged back, and when it receded again it left heaps of destruction and human loss in its wake.
Asset bubbles are like tsunamis except they are man-made, out of money instead of water, and instead of lasting for a few minutes they last for years. They draw people in, lured by apparently risk-less money. Just bend over and pick it up. What iTulip.com has been telling you for eight years is this: when you see apparently risk-less money -- financial fish flopping on the bare ocean floor -- head for higher ground. If you have the means and the risk appetite, maybe grab a few fish first. But in any case, head for higher ground. Don't stay too long and financially drown.
During the stock market bubble, that meant heeding my warning to sell in March 2000 that the tech stock bubble was going to pop. In that case, you could run slowly to high ground, as stock markets are liquid and give you plenty of opportunities to exit. During the housing bubble, that meant heading my warning in 2004 that housing markets end by seizing up, and that you can get trapped, like the tourists on the beach. And I could not have been more explicit about how the collapse of the housing bubble was likely to unfold. (Apologies to long time readers for all this past history... this is for new members of our community.)
When the tsunami of money recedes it leaves behind heaps of economic destruction within the industry that is the focus of the bubble. The technology industry has never recovered from the collapse of the NASDAQ bubble. The real estate industry won't return to normalcy, that is, to grow at the rate of inflation, for ten years or more.
The US appears to be on a continuous treadmill of asset bubbles. The Fed needs to allow them to happen and can't stop them, can't even admit that they exist and has to lie about them. Bill Gross in his August 2006 article The End of History and the Last Bond Bull Market appears to think this series of bubbles, of which housing is only the most apparent, will terminate with the end of the current bubbles, creating one last bond bull market, a period of deflation presumably followed by a crushing inflation, much in line with our Ka-Poom theory.
There is a darker explanation than either mere Fed dishonesty or incompetence. A reader recently pointed me to the web site of Catherine Austin Fitts, the founding director of Solari, Inc. who previously served as Managing Director and Member of the Board of Directors of the Wall Street investment bank, Dillon, Read & Co., Inc; served as Assistant Secretary of Housing/Federal Housing Commissioner at HUD in the first Bush Administration; and was the President and Founder of The Hamilton Securities Group, Inc., a broker-dealer/investment bank and software developer. In a long series of writings, she states:
"The supremacy of the central banking-warfare investment model that has ruled our planet for the last 500 years depends on being able to combine the high margin profits of organized crime with the low cost of capital and liquidity that comes with governmental authority and popular faith in the rule of law. Our economy depends on insiders having their cake and eating it too and subsidizing a free lunch by stealing from someone else. This works well when the general population shares in some of the subsidy, grows complacent and does not see the “real deal” on how the system works. However, liquidity and governmental authority will erode if the general population becomes aware of how things really work. As this happens, they begin to understand the power of innovative technology and re-engineering of government resources to create greater abundance both for themselves and other people. As this happens, they lose faith in the myth that the current system is fundamentally legitimate. This jeopardizes the financial markets that depend on fraudulent collateral and practices to continue to work. It also jeopardizes the wealth and power of the people who are winning with financial fraud."
Her take on the series of asset bubbles can be summed up as follows:
"This consensus is made all the more powerful by the gush of growing debt used to bubble the housing and mortgage markets and manipulate the stock, gold and precious metals markets in the largest pump and dump in history — the pump and dump of the entire American economy. This is more than a process designed to wipe out the middle class. This is genocide — a much more subtle and lethal version than ever before perpetrated by the scoundrels of our history texts."
Strong words, indeed. I'm still digesting the contents of her web site and am interested to hear comments from the iTulip community on it. Give yourself an hour to read it.
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Copyright © iTulip, Inc. 1998 - 2006 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
There is a darker explanation than either mere Fed dishonesty or incompetence. A reader recently pointed me to the web site of Catherine Austin Fitts, the founding director of Solari, Inc. who previously served as Managing Director and Member of the Board of Directors of the Wall Street investment bank, Dillon, Read & Co., Inc; served as Assistant Secretary of Housing/Federal Housing Commissioner at HUD in the first Bush Administration; and was the President and Founder of The Hamilton Securities Group, Inc., a broker-dealer/investment bank and software developer. In a long series of writings, she states:
"The supremacy of the central banking-warfare investment model that has ruled our planet for the last 500 years depends on being able to combine the high margin profits of organized crime with the low cost of capital and liquidity that comes with governmental authority and popular faith in the rule of law. Our economy depends on insiders having their cake and eating it too and subsidizing a free lunch by stealing from someone else. This works well when the general population shares in some of the subsidy, grows complacent and does not see the “real deal” on how the system works. However, liquidity and governmental authority will erode if the general population becomes aware of how things really work. As this happens, they begin to understand the power of innovative technology and re-engineering of government resources to create greater abundance both for themselves and other people. As this happens, they lose faith in the myth that the current system is fundamentally legitimate. This jeopardizes the financial markets that depend on fraudulent collateral and practices to continue to work. It also jeopardizes the wealth and power of the people who are winning with financial fraud."
Her take on the series of asset bubbles can be summed up as follows:
"This consensus is made all the more powerful by the gush of growing debt used to bubble the housing and mortgage markets and manipulate the stock, gold and precious metals markets in the largest pump and dump in history — the pump and dump of the entire American economy. This is more than a process designed to wipe out the middle class. This is genocide — a much more subtle and lethal version than ever before perpetrated by the scoundrels of our history texts."
Strong words, indeed. I'm still digesting the contents of her web site and am interested to hear comments from the iTulip community on it. Give yourself an hour to read it.
Join our FREE Email Mailing List
Copyright © iTulip, Inc. 1998 - 2006 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
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