RIDICULOUS & DANGEROUS IDEA ABOUT
THE FUTURE COURSE OF THE HOUSING BUBBLE
by Jas Jain
March 27, 2006
Jim Stack, who believes that there is, or has been, a Housing Bubble in the US and that it shows the signs of having begun to pop, says:
�Who�s to say the housing bubble will follow the path of previous bubbles?
There could be a soft landing, particularly if the new Fed chairman starts to panic and cuts interest rates.�
The question is fine, but the answer is ree-dee-culous. This sort of thinking is very dangerous because it gives a totally false hope of salvage to a precarious situation for many. �If the new Fed chairman starts to panic,� it would be positive for sustenance of the Housing Bubble? I don't want to single out Mr. Stack, because there are many a commentators and laypersons who think this way.
The sad part is that like Pavlov�s dog (now here is a term whose usage has gone down drastically) the financial newsletter writers and econmeisters alike make this connection without any foundation. The historical fact is that during the bubble mentality, the rapidly rising rates don't hurt the rise in housing prices and during the falling housing prices the rapidly lowering rates don't help. I witnessed, firsthand, the former in Silly.con Valley in early 1980s and the latter in Southern Californica in early 1990s.
Bubbles have minds of their own. When they change their mind, i.e., psychology of the active participants, it is not easily reversed.
Any sings of �the new Fed chairman� panicking will be bad for all sorts of asset markets. With the degree of leverage in the economy, there is no room for error, let alone panicky behavior, Mr. Chairman. You have been had (by being put into such a precarious position by tricky Al, who timed things perfectly for himself). Greenspan can count to 14 Fed meetings and work backwards as to when to begin the process to �remove accommodation.� What a guy! Two more bullets left for you, Benny. Have fun!!
People, especially, financial market �experts,� have very wrong ideas about the �panicky� rate cuts by the Fed and their impact on the financial assets, e.g., Scam Market, currency markets, bond markets, etc., and on the Housing Market. In that respect the former asset classes are indeed different from the last. What percent of people will buy a Single Family home within one month of �panicky� rate cut? 0.5%, give or take a little. A 2% instantaneous rate cut could make a dent, but that would be catastrophic for the global financial system wired with FWMDs in the forms of derivatives. Bernanke has so little wiggle room that it is not worth quantifying.
If you can confirm the beginning of the pop in Housing Bubble, Mr. Stack, why can't Bernanke, with the staff of 10,000, do the same now and start to panic when there could be a better chance than to panic months from now?!
It is the Leverage, Stupid! (That will take the Housing Bubble and the economy with it, with or without Bernanke panic).
© 2006 Jas Jain
Tehachapi, CA USA