Throwing responsibility for the asset bubble solely on Greenspan is sophomoric. He had no choice but to reduce rates as he did. True, he didn't have to leave them low for so long & he could have raised them faster, but unlike the stockmarket bubble, AG is a minor player in this mess. The culprit is the Bush Administration that first, eliminated the 30 yr bond & then, reduced the % of debt issued at the 10 year maturity. The result, I've read, is avg. Treasury debt has been shortened from 70 months to less than 50. That's a HUGE change in supply for Pension investors who NEED to match to LONG liabilities. When you add in other Treasury buyers looking for long hedges & offsets, it becomes painfully obvious the Administration DELIBERATELY created this squeeze to encourage lower interest mortgage rates, increased home buying & a tremendous jump in consumer spending. (It's no secret the consumer was borrowed out before the administration CREATED the housing ATM spigot.)
Like all fully opened spigots, this one will take longer to turn off. And, if Greenspan has to do ALL the turning recession risk are most definitely inreased. The best resolution would be for Treasury to signal a TREMENDOUS increase in the supply of 10yr & 30 yr. debt it will issue next year. Additionally, it should remind its HUGE mortgage lending benefactors that pigs get slaughtered. (If they don't tighten up lending practices immediately, Congress will.)
But, let's be honest, we're talking about the Bush Administration. How likely is it that just because the County's at risk they'll act responsibly?
I do agree with you, but no policy, not even the FED's works in a closed system. Taken in concert, the FED's and the White House's policy have created a mess. And to a large extent, each has been the other's echo chamber.
I think we Democratic partisans often assume that our opponents are way smarter and more devious than they truly are. Any mistake is seen as evidence of evil
When short-term interest rates were hitting lifetime lows of 1%, every well-advised large corporation, bank, and government in the world shifted their maturities down to shorter terms. They did this to save money, not to further some machiavellian political agenda. When the yield curve is steep, borrowers tend to want to borrow short term (and lenders tend to want to lend long term). That's how they maximize their current incomes.
Once interest rates start to rise, then well-advised borrowers will refi long term. Now we're seeing governments all over the world moving out to longer maturities to take advantage of relatively low long-term rates.
mai_neh. I fully understand, expect & hope that responsible borrowers follow your advice. BUT, this Administration has proved they are not concerned with fiscal responsibility - by its issuing huge tax cuts while knowing they'd be borrowing huge amounts as far as the eye could see, by its recent Transporation Bill with $24 BILLION in over-the-top pork, by it's Medicare Bill, and by its 5 yr growth of Federal expenditures (sans war & entitlements).
I question everything this Administration does & I don't accept any of their explanations at face value. 18 months ago Treasury knew our $ policy had changed (regardless what Snow was saying) and it knew AG was about to embark on an overdue course correction. That was the time to go out on the curve. I believe by diliberately limiting long supply they're creating a short-term imbalance that will increase the price we'll all pay in the long-ter.
Isn't it the fact that if you believe that inflation will be nonexistent and you were the central bank, you would be offering TIPS and shorter term treasuries?
Greenspan is a huge part of the problem. he agreed to the lunatic Bush tax cuts, he raised rates in the last year of Clinton-Gore to 6.5% (shd have raised margin rates on stock instead to burst the bubble instead of blunderbuss of economy-wide rates, just as they shd now be tightening up lending and capital requirements for housing lenders) only to lower them to 1% for way way too long. the man's a menace. problem is, Bernanke seems to be just as big a sychophant for Republicans
mai_neh: It's painfully obvious that 90% of the posts here are Democratic partisans engaged in a mutual game of agreement that blames Bush for everything. "Tax cuts for the rich" and name-calling of Bush supporters are frequently found herein.
There is an argument for a structural shift in the housing market. (This may make your assessment of the probability that we are in a housing market rise or fall depending on whether you take the glass is half empty or half full viewpoint.)
Securitization of mortgages has resulted in a much larger potential pool of funds that mortgage borrowers can draw on. This has reduced the creditworthiness threshold for mortgage borrowers. Hence we have a housing boom.
Essentially the mortgage market now has a similar structure to the housing market. There are financial intermediaries between lenders (and we can think of buyers of stock as a subcategroy of lender) and commercial borrowers. Without the securitization provided by the financial system, commercial borrowers would have a much harder time obtaining capital.
This change also means that the housing market has acquired some of the "deficiencies" of the financial security market - including the presence of institutional distance between lender and borrower (he/she who controls the underlying capital good), with associated agency costs.
Glass half full: house prices reflect a change in the market structure.
Glass half empty: the housing market is behaving like a securities market during a boom cycle - hence a crash is coming.
jl, I don't think the FED is trying to burst the housing bubble by raising rates. Real fed fund rates are still below neutral, so I think the FED is just trying to get back to a normal interest rate enrvironment. Although its not exactly clear what neutral is, it is probably around 4.25% to 4.5% FED funds rate.
If the economy was healthy, neutral rates would be no problem. Unfortunately I think neutral rates will impact the economy by deflating the housing bubble. This doesn't mean the FED is targeting the bubble, just that the bubble will probably get hit.
I support raising rates to neutral. I don't want to send the economy into recession, but I'd like to expose any structural problem so it can be addressed. pgl at Angry Bear is concerned about higher rates because he views employment as weaker than desirable (based on participation). That is obviously a valid concern.
Chad, The Fed (Central Bank) doesn't issue debt, the Treasury (under the President) does. The same Administration that's run up our debt up to more than $400 BILLION DEBT PER YEAR. Do you really think they reduced the avg. length of our total outstanding securities by almost 30% to save interest payments. I love that argument & but I'd need to hear ONE other example demonstrating this Administration's desire to be fiscally responsible before I'm convinced. Anyone who believes inflation is dead doesn't shop for food, doesn't buy gas for a car, doesn't pay for college, doesn't have medical bills, hasn't been looking to buy a home, doesn't go to Disneyland or Seaworld, & hasn't taken the family on vacation for a while. I think you're on to something because that would include guess that would include Bush AND Greenspan.
Jason, Is your sole argument that that I'm biased? I love tax-cuts, but what Bush did was not a tax-cut for you, your future kids & Grandkids who'll be paying back the debt. Why call it a tax-cut, why not call it a redistribution of wealth.
Jason Wright: Don't jump to conclusions, and don't assume everybody can be sorted into just two boxes. Being critical of past & current administration policies does not imply being a Democrat (with an uppercase D).
Throwing responsibility for the asset bubble solely on Greenspan is sophomoric. He had no choice but to reduce rates as he did. True, he didn't have to leave them low for so long & he could have raised them faster, but unlike the stockmarket bubble, AG is a minor player in this mess. The culprit is the Bush Administration that first, eliminated the 30 yr bond & then, reduced the % of debt issued at the 10 year maturity. The result, I've read, is avg. Treasury debt has been shortened from 70 months to less than 50. That's a HUGE change in supply for Pension investors who NEED to match to LONG liabilities. When you add in other Treasury buyers looking for long hedges & offsets, it becomes painfully obvious the Administration DELIBERATELY created this squeeze to encourage lower interest mortgage rates, increased home buying & a tremendous jump in consumer spending. (It's no secret the consumer was borrowed out before the administration CREATED the housing ATM spigot.)
Like all fully opened spigots, this one will take longer to turn off. And, if Greenspan has to do ALL the turning recession risk are most definitely inreased. The best resolution would be for Treasury to signal a TREMENDOUS increase in the supply of 10yr & 30 yr. debt it will issue next year. Additionally, it should remind its HUGE mortgage lending benefactors that pigs get slaughtered. (If they don't tighten up lending practices immediately, Congress will.)
But, let's be honest, we're talking about the Bush Administration. How likely is it that just because the County's at risk they'll act responsibly?
Bailey,
I do agree with you, but no policy, not even the FED's works in a closed system. Taken in concert, the FED's and the White House's policy have created a mess. And to a large extent, each has been the other's echo chamber.
I think we Democratic partisans often assume that our opponents are way smarter and more devious than they truly are. Any mistake is seen as evidence of evil
When short-term interest rates were hitting lifetime lows of 1%, every well-advised large corporation, bank, and government in the world shifted their maturities down to shorter terms. They did this to save money, not to further some machiavellian political agenda. When the yield curve is steep, borrowers tend to want to borrow short term (and lenders tend to want to lend long term). That's how they maximize their current incomes.
Once interest rates start to rise, then well-advised borrowers will refi long term. Now we're seeing governments all over the world moving out to longer maturities to take advantage of relatively low long-term rates.
mai_neh. I fully understand, expect & hope that responsible borrowers follow your advice. BUT, this Administration has proved they are not concerned with fiscal responsibility - by its issuing huge tax cuts while knowing they'd be borrowing huge amounts as far as the eye could see, by its recent Transporation Bill with $24 BILLION in over-the-top pork, by it's Medicare Bill, and by its 5 yr growth of Federal expenditures (sans war & entitlements).
I question everything this Administration does & I don't accept any of their explanations at face value. 18 months ago Treasury knew our $ policy had changed (regardless what Snow was saying) and it knew AG was about to embark on an overdue course correction. That was the time to go out on the curve. I believe by diliberately limiting long supply they're creating a short-term imbalance that will increase the price we'll all pay in the long-ter.
Isn't it the fact that if you believe that inflation will be nonexistent and you were the central bank, you would be offering TIPS and shorter term treasuries?
Greenspan is a huge part of the problem. he agreed to the lunatic Bush tax cuts, he raised rates in the last year of Clinton-Gore to 6.5% (shd have raised margin rates on stock instead to burst the bubble instead of blunderbuss of economy-wide rates, just as they shd now be tightening up lending and capital requirements for housing lenders) only to lower them to 1% for way way too long. the man's a menace. problem is, Bernanke seems to be just as big a sychophant for Republicans
I agree with CR that tightening the lending guidelines would be more effective to tackle the housing bubble than raising the fed fund rate.
Although raising the fed fund rate during the past year was probably the right thing to do to.
mai_neh: It's painfully obvious that 90% of the posts here are Democratic partisans engaged in a mutual game of agreement that blames Bush for everything. "Tax cuts for the rich" and name-calling of Bush supporters are frequently found herein.
There is an argument for a structural shift in the housing market. (This may make your assessment of the probability that we are in a housing market rise or fall depending on whether you take the glass is half empty or half full viewpoint.)
Securitization of mortgages has resulted in a much larger potential pool of funds that mortgage borrowers can draw on. This has reduced the creditworthiness threshold for mortgage borrowers. Hence we have a housing boom.
Essentially the mortgage market now has a similar structure to the housing market. There are financial intermediaries between lenders (and we can think of buyers of stock as a subcategroy of lender) and commercial borrowers. Without the securitization provided by the financial system, commercial borrowers would have a much harder time obtaining capital.
This change also means that the housing market has acquired some of the "deficiencies" of the financial security market - including the presence of institutional distance between lender and borrower (he/she who controls the underlying capital good), with associated agency costs.
Glass half full: house prices reflect a change in the market structure.
Glass half empty: the housing market is behaving like a securities market during a boom cycle - hence a crash is coming.
jl, I don't think the FED is trying to burst the housing bubble by raising rates. Real fed fund rates are still below neutral, so I think the FED is just trying to get back to a normal interest rate enrvironment. Although its not exactly clear what neutral is, it is probably around 4.25% to 4.5% FED funds rate.
If the economy was healthy, neutral rates would be no problem. Unfortunately I think neutral rates will impact the economy by deflating the housing bubble. This doesn't mean the FED is targeting the bubble, just that the bubble will probably get hit.
I support raising rates to neutral. I don't want to send the economy into recession, but I'd like to expose any structural problem so it can be addressed. pgl at Angry Bear is concerned about higher rates because he views employment as weaker than desirable (based on participation). That is obviously a valid concern.
Best Regards!
Chad, The Fed (Central Bank) doesn't issue debt, the Treasury (under the President) does. The same Administration that's run up our debt up to more than $400 BILLION DEBT PER YEAR. Do you really think they reduced the avg. length of our total outstanding securities by almost 30% to save interest payments. I love that argument & but I'd need to hear ONE other example demonstrating this Administration's desire to be fiscally responsible before I'm convinced. Anyone who believes inflation is dead doesn't shop for food, doesn't buy gas for a car, doesn't pay for college, doesn't have medical bills, hasn't been looking to buy a home, doesn't go to Disneyland or Seaworld, & hasn't taken the family on vacation for a while. I think you're on to something because that would include guess that would include Bush AND Greenspan.
Jason, Is your sole argument that that I'm biased? I love tax-cuts, but what Bush did was not a tax-cut for you, your future kids & Grandkids who'll be paying back the debt. Why call it a tax-cut, why not call it a redistribution of wealth.
Jason Wright: Don't jump to conclusions, and don't assume everybody can be sorted into just two boxes. Being critical of past & current administration policies does not imply being a Democrat (with an uppercase D).