8, 8 days until Disney! Ah ha ha!

Greenspan needs to learn to STFU

http://www.msnbc.msn.com/id/8647548/

In some of his strongest remarks yet about the potential fallout from high housing prices, Greenspan reiterated warnings about the increasing use of what he described as “exotic” mortgages and referred to “speculative fervor” that has driven up prices in some markets.

“This type of expansion in prices historically does not go on very long and indeed, while it’s hard to forecast, and I’m not sure that it’s going to occur, there may be -- there certainly will be in certain local areas -- price declines,” Greenspan said.

******************

Doesn't Greenspan realize the power his words have? The guy may have single-handedly created the 2001 recession with his doomsaying and overeager money restriction, then lifted the country out of it.

If he talks about bursting the housing bubble so very starkly, he may incite the crash. I'm not saying housing prices aren't overinflated or that they don't need to come down; I just think it can be handled more subtly than to yell "The Sky Is Falling!" from Capitol Hill.

Philo
Permalink Philo 
August 29th, 2005
I sincerely HOPE that his remarks will precipitate the crash of the housing market. It's not sustainable and it has raised the barrier of entry for people my age (particularly in the northeast) to near impossible levels.
Permalink muppet 
August 29th, 2005
Too bad you can't sell houses short.
Permalink Aaron F Stanton 
August 29th, 2005
Yeah, it's much better to ratchet up the bubble to at least twice, if not three times the size it is now before bursting it.
Permalink MarkTAW 
August 29th, 2005
If one guy's words can crash the market then it was already teetering at the brink.
Permalink ronk! 
August 29th, 2005
I doubt my words could pop it, but Greenspan's can.
Permalink Aaron F Stanton 
August 29th, 2005
I actually agree with muppet on this one, which surprises me. :)

It's crazy when you live in an area, have a couple making six figures and can only offord a shitty condo, let alone a house. The housing market here in Silicon Valley is starting to slow down a bit, which is long overdue.
Permalink QADude 
August 29th, 2005
Aaron, are you implying that it's only teetering at the brink when *you* are able to push it over?
Permalink ronk! 
August 29th, 2005
"The guy may have single-handedly created the 2001 recession"

He had to - if he didn't we'd all be idle billionaires and the inflationary pressure on luxury yachts would be too great.
Permalink Dennis Forbes 
August 29th, 2005
No, ronk!, I am, of course, capable of crashing global economies on a whim. I must measure my every apostrophe with care, lest I send New Zealand into an ever accelerating spiral of doom, and my exclamation points are far from to be trifled with, as well.

Or maybe I'm saying that Greenspan's words carry a lot of weight.

Moron.
Permalink Aaron F Stanton 
August 29th, 2005
You just coupled ! and ,

I wonder what parts of Antartica will go into recession.
Permalink MarkTAW 
August 29th, 2005
I only do that as an example of my power.
Permalink Aaron F Stanton 
August 29th, 2005
So my house decreases in value by 100K. BFD.
Permalink son of parnas 
August 29th, 2005
Aaron, I agree that his word carry WAY more weight than yours. But my point is, that if ANY person's observations about a market can cause it to tank then it was seriously ill to begin with.

Note that '96 his "irrational exuberance" comments preceeded a long long run-up in the stock marktet. It grew because it was actually a heathly market at the time, his words had little effect.
Permalink ronk! 
August 29th, 2005
Rules:
1) Don't panic.
2) Panic first!
Permalink Tayssir John Gabbour 
August 29th, 2005
Ronk, when Greenspan used the words "irrational exuberance" to refer to the stockmarket, the stock bubble popped. Folks nowadays claim that it was obviously overpriced while being among the ones claiming that the old rules were gone and that there is no limit.

Yes, there is a bubble in the real estate market. Here in Denver, when the last real estate bubble popped (when the oil/coal/energy industry took a dump in the early-mid 80s), some areas of Denver saw house prices drop 80%. "Blood in the streets" is the term, and I sure wish I had a small stash of cash to take advantage of it when it rolls around again. But since the new bankruptcy laws go into effect in October (that's just a month away), you'll be screwed big-time if you have to file Chapter 11 anytime after, say, November 2005.
Permalink Peter 
August 29th, 2005
I remember hearing stories about Houston, when their housing market had a drop. Stories such as homeowners leaving the keys in the mailbox and driving away.
Permalink example 
August 29th, 2005
But that's houston.
Permalink son of parnas 
August 29th, 2005
BURN BABY BURN!! BURN THAT MUTHA DOWN!!!!

I'm so sick of this bubble just hovering over our heads.

I can't believe I'm coming of age during this mess.
Permalink sharkfish 
August 29th, 2005
Which mess would you have preferred?

Wordwars. Local wars. Disease. Famine. There are many good eras to choose from.
Permalink son of parnas 
August 29th, 2005
>But that's houston.
During that time, in the midwest, some homeowners were so tight, that lenders wouldn't have a clue when the homeowners would move out. So the banks hired retired folks to drive around, just to look and see if the lights were on in all their mortgaged properties. It wasn't limited to Houston. I had a 10-state territory at that time, it was happening in all those rectangular states in the midwest. Iowa seemed to be the worst.

Farm murder-suicides were way up. You know those: father/husband kills everyone (including the livestock) then shoots themselves. All during the Reagan Empire, when everyone was claiming the "economy was booming." Along the coasts it was, flyover country was shrivelling up. Everytime I'd drive through a town, I'd see more stores boarded up. If they built a walmart nearby, the mainstreet of that town would all be boarded up within 6 months. That was back when walmart advertised that they were buying American. Now, walmart is China's 5th largest trading partner.

I had a house in KC at the time. The S&L wrote off almost $11k when I moved out. I lost about the same (downpayment and closing costs you know).

>But that's houston.
All you had to do was go anywhere in the midwest and see the same thing. It didn't take a lot of effort to see it. It *did* take a lot of effort to pretend it wasn't happening.
Permalink Peter 
August 29th, 2005
Read Paul Krugman's article on "Greenspan and the Bubble" in today's NY Times.
Permalink Dana 
August 29th, 2005
" Which mess would you have preferred?

Wordwars. Local wars. Disease. Famine. There are many good eras to choose from."

The one my parents had, when a house didn't cost more than 3000% of their income...
Permalink sharkfish 
August 29th, 2005
> All you had to do was go anywhere in the midwest and see the same thing.

But the midwest has been depopulating for sometime. There's no population or economic pressure to keep prices up.
Permalink son of parnas 
August 29th, 2005
I think Philo may be blowing Greenspan's comments out of proportion, simply because Greenspan's influence on the housing markets isn't nearly as strong as it is over the stock market.

The vast majority of the trades in the stock market aren't entered by individuals, but by institutions like mutual funds and hedge funds. There aren't very many of these institutions and they buy in incredible numbers. If these relatively few entities aren't buying, the market will dip very quickly. Since these traders are financial professionals, they'd be more likely to listen to Greenspan and thus heed his warnings regarding asset bubbles. The markets move when Greenspan speaks because he carries a lot of influence with these relatively few market movers.

Contrast this with the housing market, where there aren't a few thousand buyers and sellers, but tens of millions.
Most of these buyers and sellers aren't financial professionals, and likely won't care what Greenspan has to say. Many more uninformed participants means it's much harder to get a message across, even if it comes from Alan Greenspan.
Permalink codypo 
August 29th, 2005
"Read Paul Krugman's article on "Greenspan and the Bubble" in today's NY Times."

I never understood the relationship between government debt & the rest of the economy. Or if I ever did, it was during my macroeconomics class in college.

Would someone care to enlighten me as to why a federal deficit is bad for the private sector?
Permalink MarkTAW 
August 29th, 2005
"Would someone care to enlighten me as to why a federal deficit is bad for the private sector?"

Because since there is NO gold standard and our money is backed by faith in the government instead of tangible goods, the easiest way to "pay off" debt is to simply inflate it away. Now, they can't do it too fast otherwise you'd have Germany in the 20's all over again.


The question I'll throw out here is: "When a country can print as much money as it desires, is there a need for taxes?"
Permalink KC 
August 29th, 2005
I just had a neighbor sell their house, and buy a new one. My wife pointed out they picked a good time to sell. We had just seen that housing prices had reported a decline for July.

Here's the problem. If you sell your house at the top of the market, you have to buy another house -- also at the top of the market.

Let's say you sold your old house for $200,000. You buy your new house for $300,000 (getting a loan for the extra $100,000). Now housing values drop 10%. Your new house is now worth %270,000, and you still owe that $100,000. Somewhere in there, you lost $30,000 dollars.

Over the long term, this is not a problem, you'll make it up eventually. It's worse for people who have no equity. If you bought a $200,000 house with nothing down, if it becomes worth $180,000 you still owe $200,000. You have 'negative equity' -- you can't sell that house unless you come up with the additional $20,000 to pay off the bank. (Or live there long enough that the housing market finally rises enough).
Permalink AllanL5 
August 29th, 2005
But I do agree that popping an 'irrational exuberance' bubble early is MUCH better than letting it grow and grow.
Permalink AllanL5 
August 29th, 2005
"The question I'll throw out here is: "When a country can print as much money as it desires, is there a need for taxes?" "

First of all, "Printing money" is called inflation, and we don't have inflation currently. So we're NOT merely "printing money", we are borrowing it. We are borrowing it by selling bonds -- the 30 year treasury note was JUST resurrected, a mere 4 years after it was no longer sold (because of the Clinton era balanced budgets).

We are borrowing it from ourselves (people buying bonds) and the Chinese, Japanese, and Germans, for whom our meager 4% return seems wonderful. The cost for this borrowing is called "debt service", and currently our "debt service" stands at around 350 Billion dollars a year. And growing.

Note 300 Billion dollars a year used to be the U.S. military budget. Now it's debt service -- payments to ourselves (and other countries).
Permalink AllanL5 
August 29th, 2005
This might sound bad, but I'm eagerly awaiting the housing crash here in San Diego. A condo the size of my apartment 1100 Sq. Ft. in my neighborhood goes for $350k - $450k.

A house? Forgetaboutit.

I say keep building you stupid, land ruining, developers, keep building, so the damn place will become saturated and your greedy asses can take a loss for once. And I can *actually* afford to live here.
Permalink Jared 
August 29th, 2005
Don't think about it as a current account defecit, think about it as a capital account surplus ;)
Permalink 28/w 
August 29th, 2005
>> We are borrowing it from ourselves (people buying bonds) and the Chinese, Japanese, and Germans, for whom our meager 4% return seems wonderful. <<

This can't last forever (as I'm sure you know). Sooner or later, the world economy will catch up with our current growth rate and our interest rates won't seem so attractive. Or some country will artificially raise rates to attract that investment money (a temporary strategy on their part, but if it works...)
Permalink example 
August 29th, 2005
'The question I'll throw out here is: "When a country can print as much money as it desires, is there a need for taxes?"'

Now there's a question worth throwing out.
Permalink Now That's More Like It 
August 29th, 2005
>> I can't believe I'm coming of age during this mess. <<

There's a mess about every 11 years -- don't fret too much over it.

Hmmm. Also about every 4 years (presidential election years). There's no crisis like a manufactured crisis.
Permalink example 
August 29th, 2005
" 'The question I'll throw out here is: "When a country can print as much money as it desires, is there a need for taxes?"'

Now there's a question worth throwing out."


Yeah, most people don't like the implications of that.

The answer is "No, there is NO need for taxes!" because at any given time, you just print more money.

For example, do you think Bill Gates has a monthly budget? If he *did* have a monthly budget, do you think he'd be concerned with following it?
Permalink KC 
August 29th, 2005
> Sooner or later, the world economy will catch up with our current growth rate and our interest rates won't seem so attractive.

US GDP is about 12 trillion, and the US deficit is about 800 billion.

So, deficit divided by GDP is 800/12000 or nearly 7%. Could it be that the 'growth' you mention is just nothing but borrowing, i.e. nothing but a growth in the US' debt?
Permalink Christopher Wells 
August 29th, 2005
Many of these "simple questions" are the most haunting to me, as I don't yet have the tools to answer them satisfactorily.

I took an economics class which did answer this question ("inflation bad, mmkay?"), but modern econ is such pseudoscientific BS that their answers generally can't be taken seriously. I mean, I wish they'd just stand in front of class with a scary mask and explain, "Inflation -- BOOGA BOOGA!!" That would've wasted a lot less time for everyone involved.
Permalink Tayssir John Gabbour 
August 29th, 2005
> Because since there is NO gold standard and our money is backed by faith in the government instead of tangible goods,

Gold is a stupid element dug out of the ground. Ground largely from other countries. Why in heck would I base anything on such silly fiction?
Permalink son of parnas 
August 29th, 2005
KC, are you entirely serious?  Are you just having a joke and I'm too dumb to recognise your brilliant satire?

Because you do sound like you have about the same grasp of basic economics as the average cabbage has of advanced quantum mechanics, and I hope you're just pretending that you don't know what the word "inflation" actually means.
Permalink  
August 30th, 2005
>'The question I'll throw out here is: "When a country can print as much money as it desires, is there a need for taxes?"'
Somewhere, our family has some old German hyperinflation bank notes. Some of them have a "not valid before" date along with a "not valid after" date. You'd be paid twice a day, because prices changed *that* often. Inflation rates of like 10%-50% PER DAY. You had to run out at lunch and shop before your pay became even more worthless. Everyone quickly learned barter and arbitrage. The notes with the dates on them were to slow down the velocity of cash through the economy, but it didn't work. You'd need a wheelbarrow of cash to purchase a bag of groceries. Sometimes they didn't bother cutting the sheets of banknotes. The value changed so often that stamps weren't printed with numbers on them: they'd overprint the stamps with this week's (or today's) price for letter delivery.

They had to hide the printing presses on trains, and move them around all the time. Because the public would destroy them if they could find them. And probably lynch the poor guys running them: those guys were just following orders. But they'd still get a necktie party if they were found.

It was illegal to ask if the purchaser was paying in paper marks or gold marks (the difference reached a multiplier of tens of millions before it became a capital offence to ask that question and it might be family exaggeration that it became a capital offence, like walking 15 miles in the snow to school, uphill both ways, I'm not sure).

The inflationary period ended when a certain dude with a narrow mustache most of us hate restored Germany to the gold standard. That is part of why that public admired him so much: he ended a terrible financial time for them.

Prices were capped by law. So if you went to the country side to try to purchase a pig, well, none would be available at the legal prices. That one? That is Fido, our family's pet pig. I couldn't sell our pet. My daughter would cry for months. Not for... well, that looks about enough, have a nice day.

In the US, currently, the electronic money outnumbers the actual cash by something like 10 to 1 (or maybe a lot more). You'd have to read about stuff like "M1 money supply" to understand what is going on. All that has to happen is for people to lose "faith" and the economy tanks. If China and Japan stop purchasing t-bills and t-notes, the feds will have to either print tons of cash or raise taxes to cover the deficit (and I don't see a logical reason why they are continuing to do so). And in the currency exchange markets, many currencies have more money change hands each day than exists in cash in their entire currency.

Argentina had some years of over 1000% inflation per year. All you have to do is look at history to get an idea of why printing money isn't the solution. Even the Chinese stopped making paper fiat money and returned to the silver standard, and they invented paper money, and we still use their word for paper money: cash.

>For example, do you think Bill Gates has a monthly budget?
If you divide the number of dollars he earns by the number of seconds in a year, it is not economic for him to bend over and pick up a $100 bill that is laying on the ground. His time is worth more than the return of $100 for those 3-4 seconds it takes to bend over and pick it up. I think very few people have an idea of what that sort of income is.
Permalink Peter 
August 30th, 2005
> Inflation rates of like 10%-50% PER DAY.

A german postage stamp from that era: originally "5 marks", overstamped "2 billion".

> That is Fido, our family's pet pig.

That documentary I mentioned about why Poland couldn't afford to keep printing money, e.g. to subsidize its steel industry: that it was because printing money like that caused inflation ... that documentary also mentioned the government-imposed price caps on consumer goods, which meant that farmers were better off not bringing their farm produce into town for sale.

http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/tr_show02.html#12
Permalink Christopher Wells 
August 30th, 2005
Joseph Stiglitz (former chief economist of the World Bank) estimates that with inflation below 40%/year, "there is no evidence that inflation is costly." Beyond that 40%, hyper and unpredictable inflation apparently is costly.

Searching on the web, I find that discussions on currency systems have extremely low signal/noise ratios. Currency is merely an abstract tool, and many financial problems are as absurd as a carpenter running out of inches.

So yeah, 1 zillion% inflation rates suck, but I don't think we're talking about that.

In particular, I don't see the point of someone chiding another for not "understanding" inflation. In technical forums untouched by politics, people are glad to take the time to patiently field questions. The less we know what we're talking about though, the more we resort to put-downs.
Permalink Tayssir John Gabbour 
August 30th, 2005
(My comment was largely addressed to the blank fella.)
Permalink Tayssir John Gabbour 
August 30th, 2005
> inflation below 40%/year [is not costly]

It's not 'costly', I suppose: if you have no savings; or if you use your savings to buy a real asset (e.g. gold or a house) that retains its value relative to other assets; or if you invest your savings and get a return on investment of more than 40%.
Permalink Christopher Wells 
August 30th, 2005
Inflation above 3 or 4% is incredibly costly. First of all there are the strikes and disruption as workers need to negotiate their pay scales every year.

Then there are the incredibly high interest rates necessary to counter inflation.

And finally there is the total uncertainty that this kind of inflation brings.
Permalink Stephen Jones 
August 30th, 2005
Peter:

>The inflationary period ended when a certain dude with a >narrow mustache most of us hate restored Germany to the gold >standard. That is part of why that public admired him so >much: he ended a terrible financial time for them.

Gustav Stresemann didn't have a narrow mustache. Also, he didn't restore the mark to on back to gold standard, but to Rentenmark, backed by government bond. Hitler didn't become Chancellor until ten years later.
  -tim
Permalink a2800276 
August 30th, 2005
Yes, Stiglitz appears to have been talking about production and a nation's economic health as a whole, as far as I gather at the moment. And economist Robin Hahnel adds the condition that inflation be reasonably predictable, as actors may then take it into account when they contract with one another.

Hahnel adds that in normal circumstances, corporations and the wealthy rationally dislike inflation; for example, anti-inflation measures may have the hidden benefit of increasing unemployment, which undermines wages. Whereas, the majority are often better served by the opposite interest.
http://www.amazon.com/exec/obidos/tg/detail/-/0745318576/

However, I don't know how this applies to a government just printing money to pay off debt. This may be a separate issue or offer certain complications as a consequence of debt-based money.

Incidentally, it's nice to observe the historical inflation rates, wondering what happened in those years...
http://www.eh.net/hmit/inflation/
Permalink Tayssir John Gabbour 
August 30th, 2005
You mean like the negative inflation during the 20's and 30's? And the extremely high inflation during the 40's?
Permalink MarkTAW 
August 30th, 2005
"If you divide the number of dollars he earns by the number of seconds in a year, it is not economic for him to bend over and pick up a $100 bill that is laying on the ground. His time is worth more than the return of $100 for those 3-4 seconds it takes to bend over and pick it up. I think very few people have an idea of what that sort of income is."

A lot of that income is, essentially, fictional. As fictional as the 40 grand a year I make watching the walls of my house increase in value.
Permalink Katie Lucas 
August 30th, 2005
Oh, Dear, God.

You mean, Economists are now saying Inflation is not a problem till it reaches 40%? Is this the first crack in the anti-inflation economist dam that has been insuring SOME fiscal responsibility in this country since Carter?

First Volker, then Greenspan, have as heads of the Federal Reserve Board, been pursuing anti-inflation monetary policies since 1977. This policy has meant that when the U.S. Government did NOT collect enough taxes to pay for their deficit (which they hardly ever do, twice in our history we did, 1963 and 1997-199) then Government could NOT 'just print it', they had to issue bonds.

Before that, Government DID "just print it" -- leading to the double-digit inflation (10..15%) of the Nixon years -- and interest rates up to 21%.

But now, with Bush in the White House, apparently printing money is now a desirable activity. So this conservative fiscal policy needs to be thrown out. Be afraid. Be very afraid.

By the way, our deficit each year is now about $300 Billion. The TOTAL cumulative deficit is around 10 Trillion, and growing.
Permalink AllanL5 
August 30th, 2005
"Would someone care to enlighten me as to why a federal deficit is bad for the private sector?"

When a government spends more in a given year than it earns it means that there is a deficit. If this happens, the government needs to borrow from another government. So the government imports more than it exports. It can either have debt or sell its assets. As with individuals, a government will get into debt initially and when it becomes difficult to repay the debt, begin to sell their assets.

It is not always bad when a country has debt. Imported products compete in the market and it paves way for consumers to get better products. It is similar to what happens when a company borrows money. If a company borrows money and spends it on a bad acquisition, it is not a good use of the money. But if it spends it wisely it's good for the firm's growth. But there needs to be limit in borrowing money. A company shouldn't have a high debt to equity ratio. If it's high it means that the company's aggressive in using its debt. But it increases the interest expense as well. Enron had $9 of debt for every $10 of equity few years before it went bankrupt. A couple of quarters later it rose to $11 and a quarter after that it was $14. And eventually it went bankrupt.

Similarly if a country goes high on debt it would be forced to import more from other countries. The products the private sector would have produced if the imports weren't too high will not be produced in the country. Once this happens, if the government pays up a chunk of the deficit, imports would reduce. But the demand from the consumers wouldn't change so the country would consume more of whatever was exported and the exports will also reduce thereby. If exports aren&#8217;t enough, paying to others would become difficult and the deficit wouldn&#8217;t reduce as fast and it might even increase again. So the deficit should not be high enough for this to happen, which in turn would affect the private sector.
Permalink Senthilnathan N.S. 
August 30th, 2005
Why does import of money (government borrowing) equate to import of consumer goods (private enterprise)?
Permalink Ian Boys 
August 30th, 2005
It does not, Selni has that incorrect. But borrowing of money from another country does imply debt service payments on that borrowing. Currently that debt service on the current total debt stands at $300 Billion a year.
Permalink AllanL5 
August 30th, 2005
"Why does import of money (government borrowing) equate to import of consumer goods (private enterprise)?"

Perhaps it's not necessarily so, but it seems to have worked out that way with Japan and China with the U.S.
Permalink Jim Rankin 
August 30th, 2005
Deflation suits those on fixed incomes and also employers as the accompanying depression gives them a docile labour force.

In the Great Depression in England in the 30s the Middle Class was better off than ever before as deflation was in effect a pay rise for those on fixed incomes.

However, although there can be economic growth even with a high level of constant inflation (Brazil had a regular inflation rate of 100% for many years), it is rare that inflation remains constant. The fact that we have had low inflation rates in the UK and US since the mid-eighties seems to have resulted in people taking it for granted, and forgetting all the problems that came with the inflation of the seventies and early eighties.
Permalink Stephen Jones 
August 31st, 2005

This topic was orginally posted to the off-topic forum of the
Joel on Software discussion board.

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