Do Not Step Too Close To The Edge. The Grand Canyon Is Right Below.
Mr. Turtle, how many licks does it take to get to the Tootsie Roll center of a Tootsie Pop? It has been incorrectly reported to be three. One, two, three, four, five. The answer five. Five wave count on Countrywide Funding which made its massive price run providing mortgages to the U.S. housing boom. Supercycle Elliott Wave 5 count? Countrywide Funding down for the count? Das ist kaput?
Does anyone other than me see any price support on this chart?
Many blame the Federal Reserve for the housing bubble with their policy post 2000. Yet, the reality is the housing bubble started in 1995 when long term rates dropped 30% and fueled the second positive wave in housing. Alan Greenspan pushed on short term rates to try to get long term rates to move higher in an effort to moderate growth. Long rates would not cooperate. The housing bubble and equity bubble might be partially to blame on central banking policy but what were they to do short of restricting credit in the mid to late 1990s and crushing the economy? Maybe central bankers need to have a more active policy in credit creation. More meddling by government bureaucrats? We can't have it both ways. You either embrace a liberal policy of government intervention or you don't. You cannot whine about the Fed creating the mess then whine if the government would create more regulation to stifle capitalism and economic vibrancy.
Manias and bubbles are complex manifestations of human behavior. In order to deal with such, central bankers need to re-think policy using this baseline. That means economists need to spend less time studying statistics and more time taking psychology classes in their educational curriculum. And, that means a different type of person needs to be an economist because studying human behavior is not a topic most economists desire, feel comfortable doing or frankly would be good at. At the end of a long wave positive expansion, people and corporations were taking massive risks. That should have been expected, could have been predicted by psychologists and has been repeated since the beginning of man.
So, what does this mean? The housing bubble would have played out post 2000 even if the Fed had not lowered rates as low as they did. Paper assets were extremely overvalued and excess liquidity was looking for a home. They found it in comparably undervalued hard assets. Maybe central bankers could have made it a little less messy but long rates are still not cooperating more than ten years later. Certainly, stricter lending practices were in order and that could have been anticipated as well. Bubbles were around long before central bankers and should central bankers disappear, they will happen long after central bankers because people never learn and we are illogically and disproportionately ruled by our instincts. Hence the term "herd".
Because of human behavior, I have long argued Glass Steagall should not have been repealed and our financial system needs very basic regulation. Regulation that should never be overturned. When it comes to the savings of citizens, basic protection should always be enforced to protect the financial system be it hedge funds, banks, insurance companies or whatever. Today, banks are competing against their customers in the world investment markets and they are effectively using client deposits to do so. Thank your politicians for that great fact.
Does Merrill, Goldman, Morgan Stanley or any other major hedge fund or major corporate trading firm care about their depositors when they are making more money trading their own accounts? The wise old Tootsie Pop owl long ago coined a prescient phrase: Financial institutions "cannot serve two masters". ("No one can serve two masters; for either he will hate the one and love the other or he will be devoted to one and despise the other.) Financial institutions should either serve their clients or they should serve themselves. Allowing the illusion of both for the sake of greed and profits creates unnecessary risk with unknown consequences. Actually, we do know the consequences. It was called 1929.
Did I mention I do not like finance stocks at this phase of this particular cycle?
Does anyone other than me see any price support on this chart?
Many blame the Federal Reserve for the housing bubble with their policy post 2000. Yet, the reality is the housing bubble started in 1995 when long term rates dropped 30% and fueled the second positive wave in housing. Alan Greenspan pushed on short term rates to try to get long term rates to move higher in an effort to moderate growth. Long rates would not cooperate. The housing bubble and equity bubble might be partially to blame on central banking policy but what were they to do short of restricting credit in the mid to late 1990s and crushing the economy? Maybe central bankers need to have a more active policy in credit creation. More meddling by government bureaucrats? We can't have it both ways. You either embrace a liberal policy of government intervention or you don't. You cannot whine about the Fed creating the mess then whine if the government would create more regulation to stifle capitalism and economic vibrancy.
Manias and bubbles are complex manifestations of human behavior. In order to deal with such, central bankers need to re-think policy using this baseline. That means economists need to spend less time studying statistics and more time taking psychology classes in their educational curriculum. And, that means a different type of person needs to be an economist because studying human behavior is not a topic most economists desire, feel comfortable doing or frankly would be good at. At the end of a long wave positive expansion, people and corporations were taking massive risks. That should have been expected, could have been predicted by psychologists and has been repeated since the beginning of man.
So, what does this mean? The housing bubble would have played out post 2000 even if the Fed had not lowered rates as low as they did. Paper assets were extremely overvalued and excess liquidity was looking for a home. They found it in comparably undervalued hard assets. Maybe central bankers could have made it a little less messy but long rates are still not cooperating more than ten years later. Certainly, stricter lending practices were in order and that could have been anticipated as well. Bubbles were around long before central bankers and should central bankers disappear, they will happen long after central bankers because people never learn and we are illogically and disproportionately ruled by our instincts. Hence the term "herd".
Because of human behavior, I have long argued Glass Steagall should not have been repealed and our financial system needs very basic regulation. Regulation that should never be overturned. When it comes to the savings of citizens, basic protection should always be enforced to protect the financial system be it hedge funds, banks, insurance companies or whatever. Today, banks are competing against their customers in the world investment markets and they are effectively using client deposits to do so. Thank your politicians for that great fact.
Does Merrill, Goldman, Morgan Stanley or any other major hedge fund or major corporate trading firm care about their depositors when they are making more money trading their own accounts? The wise old Tootsie Pop owl long ago coined a prescient phrase: Financial institutions "cannot serve two masters". ("No one can serve two masters; for either he will hate the one and love the other or he will be devoted to one and despise the other.) Financial institutions should either serve their clients or they should serve themselves. Allowing the illusion of both for the sake of greed and profits creates unnecessary risk with unknown consequences. Actually, we do know the consequences. It was called 1929.
Did I mention I do not like finance stocks at this phase of this particular cycle?
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