In the Wall Street Journal this morning former Fed chairman Alan Greenspan performs damage control on his reputation:
Any new regulations should improve the ability of financial institutions to effectively direct a nation’s savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive. Adequate capital and collateral requirements can address the weaknesses that the crisis has unearthed. Such requirements will not be overly intrusive, and thus will not interfere unduly in private-sector business decisions.
Isn’t that a post hoc analysis? How can you determine what’s the most productive until after it’s already produced? The reason that there was a housing bubble at all is that for most people their homes were their most productive capital investment.
I don’t think that the situation was the either-or one that Mr. Greenspan describes. Did the low interest rates maintained by the Fed really have no influence whatever on domestic and international markets?
Most of the rest of Mr. Greenspan’s op-ed is a complaint that an international financial market is beyond the capability of a national bank to manage—something I’ve been observing around here for a long time. Now he tells us.
For the umpteenth time. (I ain’t givin’ this up.)
Someone tell me why the Case Schiller home price index distinctly – distinctly! – took off in Q3 of 1996?
Talk about Bush regulation if you like.
Talk about Greenspan monetary policy if you like.
Talk about Wall Street greed if you like.
And on and on…….
Everyone wants to talk about the real estate bubble and all of its collateral issues and damage. Everyone wants to assess blame.
But no one wants to look at the cold hard data: the seminal statistic: housing prices, took off like a rocket in 1996. Why? Would it not make sense to look at events in the 1 to 12 months preceding a data stream that simply went through an undeniable inflection point??
But what do I know. I’ve just analyzed data for a living for 30 years…….
Drew:
I can make some guesses. Consider the DOW. In 1995 the DOW closed over 4,000 for the first time. By October of 1996 it had closed over 6,000. This was about the time that Alan Greenspan made his “irrational exuberance” comment to the effect that asset prices were rising too fast which certainly supports your observation. But note that it wasn’t just housing prices since equities were rising very rapidly, too.
In technology this was the period during which the Internet “caught on”. Microsoft Windows 95 was the first version that could support a web brower reliably (it came out in fall of 1995). AOL began offering Internet access in 1995. Its plan to offer unlimited Internet access for $19.95 per month started in 1996.
I think that in order to understand housing price increases you’d need to disaggregate the Case-Shiller index into its individual components and identify the reasons that the components rising the fastest (which I suspect were California cities) were doing so.
Here, for example, is a graph showing the Case-Shiller in the timeframe with San Francisco broken out. I believe that supports my intuition that certain specific cities dragged the whole index up.
That’s practically a visual representation of the dot-com bubble.
Dave –
I think the proposition that “wealth effect” was a part of this is perfectly valid. And clearly a number of things contributed along the line.
Further, I completely agree that your “few cities” issue is valid. However, I would caution at looking to San Francisco and tech and tying the phenomenon to tech. I think you know I have a place in Naples, FL, hardly the high tech capital of the world. Prices sky rocketed there as well, as in other cities like Vegas and Scottsdale. I know first hand that bad credit extension fueled prices in Naples……in spades. (As well as greedy speculators.)
BTW – I think you know my mantra – EZ credit is a (IMHO ‘the’) root cause here. I’m in the LBO business. I have watched how easy credit rolls right into price. Its fascinating. Another dollar of debt? Another dollar of price. Why? A fluid and competitive business. Its the same with homes (mini-LBO’s). (At least when I hear people talk about their investment rationale, its the same.)
The low equity requirements makes these investments really nothing more than low cost call options.
From that perspective, just think about the temptation!!
PS –
I may be tone deaf, but I just considered…My comments were not directed at you Dave, per se, but were really a rhetorical question to anyone who happened upon the post.
To cut to the chase. My only real concern is that we learn from these events. Hence, when I see criticisms aimed solely at Bush, which invariable pick up the argument at 2000+, I ask myself why the train left the station 4 years earlier. When I see a 2000+ argument, I flush that commentator down into the toilet of partisan shills.
I hold no brief for Bush. But if we are to be honest analysts, with pure motives, and not just pathetic shills, what really transpired? And is it possible to avoid the next one?
Hint: No.
My view of the role of the president, generally, is that he doesn’t have nearly as much power or influence as some seem to give him credit for. Moreover, I see continuity in both foreign policy and domestic policy over time and across administrations with rare exceptions.
Carter was one such exception and IMO a remarkably lousy president. I don’t believe that Obama is quite as naive as Carter and, consequently, I’m not as concerned about his foreign policy directions as I otherwise might be. He’s exhibiting remarkable ineptness in domestic policy right now. Not in getting things done—he’s remarkably successful in that respect. But what he’s doing and how he’s doing it are amateurish.