A Sunday Sermon
Watchout for false prophets. They come to you in sheep's clothing, butinwardly they are ferocious wolves. By their fruit you will recognizethem. (Matthew 7:15-23)
Watchout for false prophets. They come to you in sheep's clothing, butinwardly they are ferocious wolves. By their fruit you will recognizethem. (Matthew 7:15-23)
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Ina world where debt expands much faster than our ability to put it intoproductive use generating income, are we cursed to lurch from one assetbubble to the next?
In the late 1990's we experienced one of the most powerful popular delusions in financial history:that the average person could sit in front of a screen and get rich byday-trading shares of companies with little intrinsic value, other thana dot.name and a Hail Mary business plan. Popular Capitalism, we calledit, blissfully ignorant of the inherent oxymoron. The end came swiftlyand painfully. Within just two years in 2000-2002, $7.1 trillion ofstock market wealth evaporated, representing an astonishing 73% of GDP.
Theshock to the economy was expected to be so severe that the Fed,perennially terrorized by its institutional memory of the GreatDepression, went into panic mode, slashing interest rates to fifty-yearlows. The objective was to prevent the stock crash from turning intosomething far more menacing - and it succeeded, at least temporarily.
Data: FRB and World Fed. of ExchangesThesector chosen to produce America's urgently needed rebound was realestate. Mr. Greenspan made no bones about it: he constantly emphasizedthat average Americans hadmuch more wealth locked up in housing than in stocks and that lowinterest rates would release this "frozen" capital, letting it looseupon the economy as debt-driven consumption. Moreover, the low cost ofborrowing would increase new housing demand, create jobs inconstruction and finance, and raise existing real estate prices. Whenthe follow-up effects of new housing were added (furniture, appliances,services), the economy was expected to enter another virtuous cycle.
Itall went according to plan, until greed once more overcame common senseand yet another pernicious bubble formed. As the nation had alreadybecome accustomed to viewing capital gains as a birthright, peoplepredictably jumped from flipping stocks to flipping houses. Stockmargin was replaced with no-money-down liar loans and house prices wereoff to the races. The asset class that was supposed to act as thegolden anchor of family savings was pulled up, melted into coin andspent like so much pirate loot. By the time the real estate marketpeaked in 2006, all it took to go from one bubble pop to the next was abreathtakingly short six years.
