The Electric Commentary

Thursday, July 01, 2004

The most powerful man in the world

David Bernstein wrote a post blaming Alan Greenspan's policies for the tech bubble in the late nineties, and the current housing bubble, and consequently, with the economic consequences of those bubbles bursting. He is right that the increase in the money supply caused both of these phenomena, but the specific problems of the tech bubble recession and whatever happens in the housing sector were (and are) caused by you and me. When the money supply is increased through lowered interest rates, saving becomes unattractive compared to spending and investment. When the technology boom began, it was simply a fad. It was a popular investment, even if it was an unwise investment. It would have received a great deal of investment, eventually doomed investment, regardless of the fed's actions. The fact that people made poor decisions with their extra money is not the fault of the fed.

The housing bubble is the same situation repeated. Housing prices are soaring. Just around Chicago you can see condo complexes sprouting up all over the loop and the surrounding areas. Apartments continue to go the "condo route" and McMansions continue to spring up in the ever expanding suburbs. Anyone with half a brain can tell that the price of houses and condo's everywhere is about to drop...a lot.

Herein lies the genius of Greenspan's monetary policy. Alan Greenspan is a smart guy. He looks for inflation everywhere, not just in general consumer prices. Inflation is finally appearing, and he is now taking action. His action is very calculated. Even before the fed raised interest rates, he all but said that they would. If you know in advance what will happen, you can adjust to it, and this pre-release of information has been a cornerstone of his policies. In all likelihood, interest rates will probably continue to rise gradually, 1/4 point at a time, over the next few years. This will allow everyone to plan and adjust for it. As everyone has this information, there is no excuse to be taken by surprise. So:

1. If you own a house and are thinking of moving in the next few years, sell your house NOW. It will not be as valuable for too much longer.

2. If you rent and are thinking of buying a house now, WAIT. Sure owning a house is a good idea to build equity (instead of throwing away rent), get a few tax breaks, etc., but it's worth it to wait 6 months to a year.

Don't get caught on the bubble! You've been warned.


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