Financial Times
“The study of economy usually shows us that the best time for purchase was last year.” – Woody Allen
The Admirals Club at most airports is stocked with plenty of reading material. Although more in the mood to learn of the TomKat breakup, I pulled it together last weekend and went for loftier pursuits when I saw the interview with Robert Shiller in the Financial Times. Schiller was the Yale professor that wrote the book Irrational Exuberance five years ago and accurately predicted the stock market crash when the Nasdaq tumbled in the early 2000’s.
In the February 6, 2006 issue of the New Yorker, there was an article about the career of Alan Greenspan. John Cassidy writes, “Just as in the late nineteen-nineties, cheap money led to a speculative boom, this time in residential real estate. If Greenspan remains popular, it’s because his ministrations have made many middle-class homeowners millionaires – at least on paper. But the economy is chronically unbalanced. Like an athlete on steroids, it is ailing from the inside.”
“Greenspan has pointed out how the proliferation of home-equity loans, which allow people to cash out some of the rising value of their homes, has impacted the economy. Flush with the proceeds of such loans, many American families have been spending more than they earn.”
“Now that house prices have leveled off, home equity lending and consumer spending have slowed. If house prices fall, the impact on the economy could be devastating. In a speech last summer at a Fed conference in Jackson Hole, Greenspan referred obliquely to such an eventuality. Talking about periods when financial markets downplay possible dangers ahead, he noted that history has not dealt kindly with the aftermath.”
In my opinion, the key difference with the dotcom crash and a pending bubble burst is that back in 1999 people were really just rich on paper. Did any of them cash out of their overly inflated technology stocks? I didn’t know many that did… all I heard were stories about how much their eToys or AOL stock was worth. After it started to plummet, most held on thinking that the stock would bounce back.
Today, homeowners are also rich on paper, but most have refinanced and pulled out a portion of this equity. Americans have spent their gain with the help of adjustable rate mortgages. This is why the current correction will become increasing painful for many.
“Shiller’s theories about asset bubbles, whether tulips, shares or property: people get excited as they see the price of an asset rising, so they buy more, which pushes the prices up further until they are unsustainable. The bubble is made by a ‘story’, by excitement and glamour and once a market loses that momentum, it will experience negative feedback, where people rush to sell before things worsen further. The real estate bubble, he argues, has simply replaced the last stock market bubble as the focus of people’s avarice.”
Is there a difference between desire for wealth and plain old greed? Time will tell.
The Admirals Club at most airports is stocked with plenty of reading material. Although more in the mood to learn of the TomKat breakup, I pulled it together last weekend and went for loftier pursuits when I saw the interview with Robert Shiller in the Financial Times. Schiller was the Yale professor that wrote the book Irrational Exuberance five years ago and accurately predicted the stock market crash when the Nasdaq tumbled in the early 2000’s.
In the February 6, 2006 issue of the New Yorker, there was an article about the career of Alan Greenspan. John Cassidy writes, “Just as in the late nineteen-nineties, cheap money led to a speculative boom, this time in residential real estate. If Greenspan remains popular, it’s because his ministrations have made many middle-class homeowners millionaires – at least on paper. But the economy is chronically unbalanced. Like an athlete on steroids, it is ailing from the inside.”
“Greenspan has pointed out how the proliferation of home-equity loans, which allow people to cash out some of the rising value of their homes, has impacted the economy. Flush with the proceeds of such loans, many American families have been spending more than they earn.”
“Now that house prices have leveled off, home equity lending and consumer spending have slowed. If house prices fall, the impact on the economy could be devastating. In a speech last summer at a Fed conference in Jackson Hole, Greenspan referred obliquely to such an eventuality. Talking about periods when financial markets downplay possible dangers ahead, he noted that history has not dealt kindly with the aftermath.”
In my opinion, the key difference with the dotcom crash and a pending bubble burst is that back in 1999 people were really just rich on paper. Did any of them cash out of their overly inflated technology stocks? I didn’t know many that did… all I heard were stories about how much their eToys or AOL stock was worth. After it started to plummet, most held on thinking that the stock would bounce back.
Today, homeowners are also rich on paper, but most have refinanced and pulled out a portion of this equity. Americans have spent their gain with the help of adjustable rate mortgages. This is why the current correction will become increasing painful for many.
“Shiller’s theories about asset bubbles, whether tulips, shares or property: people get excited as they see the price of an asset rising, so they buy more, which pushes the prices up further until they are unsustainable. The bubble is made by a ‘story’, by excitement and glamour and once a market loses that momentum, it will experience negative feedback, where people rush to sell before things worsen further. The real estate bubble, he argues, has simply replaced the last stock market bubble as the focus of people’s avarice.”
Is there a difference between desire for wealth and plain old greed? Time will tell.
posted by Nina Smith at 6:19 AM
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