Krugman (NYT): Greenspan and The Bubble

[speedoo]

http://www.nytimes.com/2005/08/29/opinion/29krugman.html

I can't listen to Greenspan. Fortunately, Paul Krugman follows what Greenspan says and does, carefully.

In this column, Krugman shows what a two-faced man Greenspan is.

[babylonsister]

1. Krugman: I will read this in the a.m. but I have nothing but

respect for Krugman and he is a very smart and careful man. Add him to one of the few that sees and tells the truth!

[punpirate]

2. I distinctly remember Greenspin...

... thumping for ARMs, and his reason for doing so seemed very political--keep the bubble inflated before the 2004 elections. Since the real damage in the housing market doesn't surface for five to six quarters from the initial meltdown, he could be reasonably certain that all his cheerleading would get Bush re-elected and the shitstorm would come after his own departure from the scene.

[PurityOfEssence]

5. Nice nickname

Yeah, I remember that too. It's just crazy what people are doing and what the values are these days. We sold our old place in East Hollywood and moved to Silver Lake (about a mile and a half away) at the end of '03, and scalped as we got at that time, things have just gone nuts.

An 891 square foot two-bedroom shack on the other side of this block went on the market about two months ago and was snapped up immediately. Mind you, it has a nice view, but no front yard and only a smallish one down below in back. It was listed at $659K, and I'm pretty sure they got at least that.

People we know are doing ARMs (insane, since rates can only go up) and some are doing no-down, interest-only loans. A little bit of disruption in rates and the job market, and there's going to be an awful lot of pain.

These maniacs are looting the past (by not keeping the infrastructure up) and looting the future by piling on huge debt. The only thing that keeps it from looking like the disaster it is is the over-inflation of housing values. It's this magic money that's sustaining what consumer spending there is, and when everyone's tapped out, there will be nothing left. There are very few adequately-paying middle class jobs anymore, and all basic costs are going up.

It's like the steamboat race in the old W.C. Fields movie "Tillie and Gus" where they run out of fuel and start tearing apart the superstructure to feed the boiler; as they cross the finish line, there's little left but the hull. We're scavenging and cannibalizing everything and everyone in society so we can have one last flaming joyride. It's like being in an overcrowded car of joyous partiers laughing at the wild antics of their drunk driver, and nobody seems to see the brick wall.

("Tillie and Gus" was directed by Francis Martin, and written by Walter DeLeon, Ray Harris, Rupert Hughes, Grover Jones, Francis Martin and William Slavens McNutt.)

[question everything]

3. Selected paragraphs

If Mr. Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan's successor to manage the bubble's aftermath.

How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.

And here's where Mr. Greenspan is still saying foolish things. In his closing remarks he suggested that "an end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports and a corresponding improvement in the current account deficit." Translation, I think: the end of the housing bubble will automatically cure the trade deficit, too.

Sorry, but no. A housing slowdown will lead to the loss of many jobs in construction and service industries but won't have much direct effect on the trade deficit. So those jobs won't be replaced by new jobs elsewhere until and unless something else, like a plunge in the value of the dollar, makes U.S. goods more competitive on world markets, leading to higher exports and lower imports.

[EST]

4. Two months ago, we paid off our mortgage.

At this point we owe precisely zero, paying any accumulated credit card charges immediately. Hopefully, we can survive the coming crisis, given that we will probably have to open our doors to a few grasshopper loved ones.

[phantom power]

6. If only Krugman were Federal Reserve Chairman.

Most of what Alan Greenspan said at last week's conference in his honor made very good sense. But his words of wisdom come too late. He's like a man who suggests leaving the barn door ajar, and then - after the horse is gone - delivers a lecture on the importance of keeping your animals properly locked up.