August 26, 2005


If 'Bubble' Bursts, Legacy of Greenspan May Deflate (Bill Sing, August 26, 2005, LA Times)

As central bankers and prominent economists gather today in Wyoming to assess Alan Greenspan's 18-year stewardship of the U.S. economy, the Federal Reserve chairman is expected to win widespread plaudits for fostering solid economic growth while deftly managing several financial crises.

But the final chapter of Greenspan's legacy might be based on how well the central bank manages what many experts say is a crisis looming on the horizon: a housing bubble. [...]

Many economists who praise Greenspan's overall record nonetheless are critical of his handling of the housing market.

"This will have been the most successful period in the history of the Federal Reserve system," William A. Niskanen, a Reagan administration economic advisor and now chairman of the conservative Cato Institute in Washington, says of Greenspan's tenure. But, he says, the Fed chief made three major mistakes, including fostering banking regulations that helped precipitate today's low mortgage rates — "a condition that has contributed to what now looks like a housing bubble." [...]

[Edward Leamer, director of the UCLA Anderson Forecast and one of the first economists to label the current housing market a bubble] adds that today's housing market is different from the dot-com stock mania of the late 1990s, in that soaring Internet stock prices could at least be justified by the perception that technology was changing the world, creating a "new economy." Greenspan was blamed for helping fuel the stock bubble with statements in the late 1990s touting the "new economy."

But "houses are exactly the same now as two years ago. There is no 'new economy' when it comes to homes," Leamer says. Thus, cooling off housing should have been "an easy call to make."

Of course, the reason Mr. Greenspan's tenure is praiseworthy is because he continued to hold inflation under control after Paul Volcker and Ronald Reagan defeated it, one of the main benefits of which has been the ability to keep interest rates low. Mr. Leamer though seems to be saying he should raise rates artificially even into the teeth of a deflationary global economy and that while it was excusable to think that internet stocks that had no intrinsic value should reach ridiculous prices that houses, with obvious permanent value, should not be allowed to achieve what may or may not be unsustainably high prices.

Rates continue to fall on 30-year mortgages (Martin Crutsinger, 8/26/05, ASSOCIATED PRESS)

Rates on 30-year mortgages declined for a second consecutive week as low mortgages continued to fuel the country's housing boom.

Mortgage giant Freddie Mac reported Thursday that rates on 30-year, fixed-rate mortgages fell to a nationwide average of 5.77 percent this week, down from last week's 5.80 percent. Rates have fallen for two weeks after hitting a four-month high of 5.89 percent the week of Aug. 11. [...]

Even with the two consecutive declines, analysts said that rates should resume rising in coming weeks as the Federal Reserve continues its campaign to nudge rates higher as a way of making sure that inflation does not get out of control.

If there were any prospect of inflation they wouldn't lend you the money at those rates.

Posted by Orrin Judd at August 26, 2005 11:06 AM

"internet stocks that had no intrinsic value" is overly harsh.

There are plenty of internet companies whose stock is still valuable.

Amazon, Yahoo, Google, Earthlink, Overstock, Priceline, eBay, Apple, et al...

We didn't know who would come out on top.

There have been hundreds of American auto manufacturers.
Their stocks weren't "intrinsically" worthless, they just lost the competition.

The internet is in its infancy.
Ultimately, it will change all modern societies more than automobiles or telephones/telegraphs/radios did.

However, when contemplating investing in the internet boom, it might be helpful to realize that dry goods merchants and San Francisco real estate investors kept more money from the California gold rush than all of the miners put together, and that the largest fortune made in television was that of the founder of "TV Guide", not any of the networks.

Posted by: Michael Herdegen at August 26, 2005 4:40 PM

Apple sells computers. Amazon sells books. Computers and books have instrinsic value. The internet is a medium.

Posted by: oj at August 26, 2005 5:53 PM

Apple stock is valued on the basis of iTunes, an internet venture.

Wal~Mart is a medium, too, as is any newspaper, or any telecommunications company.

PR people and lobbyists are valued for their NETWORKS, not any tangible object that they own or produce.

Companies and individuals can make money with the internet by providing access to the network, making such access better, providing content, or by hawking wares through the medium.

GM makes objects with intrinsic value, but Yahoo and Google, who merely provide intangible information, make about a thousand times more profit.

TV Guide does the same thing, and they provide less useful and more perishable info.

Posted by: The Ghost of America Future at August 26, 2005 6:04 PM


Exactly. Owning Wal-Mart makes sense. Buying the idea of a store doesn't.

Internet stocks were based on the idea of the medium.

Posted by: oj at August 26, 2005 6:10 PM

No, the valuations were based on the "it" factor of the idea of the internet, but the underlying businesses were actual retailers, service providers, and information providers.

Again, we DID NOT KNOW what would work, and what wouldn't.
Now we have a better idea, but not a definitive one.

Claiming that only manufacturers, farmers, and construction companies create "intrinsic" value negates all of the no doubt very many years that both you & your spouse spent in school, learning how to apply intangible knowledge and abstract concepts to real-world situations.

You're the one who thinks that the U.S. should get out of the agriculture and manufacturing business, and that leaves "knowledge" work - i.e., the internet.

Posted by: Michael Herdegen at August 27, 2005 1:11 AM


No they weren't. The retailers who used the internet as a mere medium are still here and doing fine.

Medicine and Law are service jobs.

We shouldn't get out of farming or manufacture, you just can't pay workers much to do the grunt work.

Posted by: oj at August 27, 2005 9:00 AM

Our local liberal rag added the headline, "Optimism Worries Fed Chief," to to their front page story.

Here's the original AP article with its less negative headline, Greenspan: Investments won't soar forever

Posted by: erp at August 27, 2005 9:32 AM