Sunday, February 26, 2006

Mopping is Preferable to Popping

The Fed sure does spend a lot of time talking about current asset bubbles even though they also claim that an asset bubble cannot be identified as such until after it busts. Anyway, this article indicates that Bernanke has no intention of deliberately popping the real estate bubble. Instead, he is going to 'protect the financial system' which means the banks; the little guy be damned.

My $0.02: That will probably mean low rates for banks and high borrowing rates for consumers. So I guess what Bernanke is saying is when real estate tanks those of you who find yourself 'under water' will have to fend for yourself. Thanks Ben! Maybe what the Fed has been thinking is that the speculative element of recent years vis-à-vis real estate has been so patently obvious and they (the Fed) have telegraphed their warnings long enough now that anyone who still plays this speculative game will have to pay the price when their bets go bad.

And then, as the pendulum of public and private opinion regarding debt finally swings the other way the situation will only get significantly worse. You tell me, is now a good time to be buying real estate? When the fire sales begin, cash will be king.

Some choice quotes:
Federal Reserve Chairman Ben S. Bernanke, like his predecessor Alan Greenspan, doesn't plan to get in the way of surging home or stock prices.

Bernanke, staking out a key policy in his first month on the job, said yesterday at Princeton University that the central bank "doesn't really have good instruments for addressing asset price bubbles should they exist, particularly if they are in one particular segment or another.''

"To use interest rates to try to puncture the housing bubble would be a disastrously bad idea, and Bernanke obviously agrees, because he's not going to come close to doing that,'' said Alan Blinder, a former Fed vice chairman...

Blinder said the Greenspan-Bernanke approach to bubbles is "basically, you do nothing, and then the corollary to that is that you mop up after they burst to keep the financial system from taking a big fall.'

"Bernanke is not inheriting the best of situations,'' Volcker said in an interview after Bernanke's speech. "How would you like to be responsible for an economy that's dependent upon $700 billion of foreign money every year? I don't know what I would do about it, but he's going to have to do something about it sooner or later.''

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