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Nadeem
Veteran Investor
Joined: 11 Jul 2004
Posts: 639
Cash Points ££ 13955.74
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 Posted: Sat Jan 27, 2007 2:21 am Post subject: Low US interest rates ignited unsustainable asset bubbles |
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Can you possibly stand another article about Greenspan? If the answer is “no” I completely understand – I too am ready to let the man take his place in history next to the buggy whip – but he was responsible for something that will be resonating in your life for a very long time.
Since I've already typed two complete sentences and am still on topic, I think it's time for a detour. So let me tell you that I am cursed with a brain that connects dots. Worse, my brain likes to store things up as though random news items were potatoes and a particularly vicious Polish winter were on the way. The fact that I live in the US only confuses things all the more.
But that's not the point. The point is that Alan Greenspan is either depraved or a fool and, of the two, I am not sure which I feel worse about as describing the man who was at the helm of the monetary bobsled during the longest stretch of paper credit expansion the world has ever seen.
Let's play ‘connect the dots':
1. In December 2002, private bankers warned Greenspan that consumers were taking on worrisome amounts of debt and that an unsustainable, interest rate driven housing bubble was fueling this behavior (page 22 of this linked document) .
2. In July of 2003 Greenspan lowered interest rates to one-percent (as in 0%, or one-point-oh ), an emergency rate, and held it there for over a year (see chart below).
3. In February of 2004 Greenspan advised Americans that they'd be better off with adjustable rate mortgages (ARMs) than they would with fixed rate mortgages.
4. In October of 2005, the new bankruptcy law, largely written by private banking lobbyists and insiders, was passed.
Here's how those data points look when plotted out on a chart of short-term interest rates:
To summarize; (1) Mr. Greenspan was warned that he was igniting an unsustainable asset bubble, (2) he threw more gasoline on the fire, (3) he then advised consumers to switch to ARMs right before what he knew (for certain) would be a protracted period of rising interest rates, and then (4) kept mum while bankers worked feverishly to pass bankruptcy legislation that was indisputably banking-friendly but a consumer nightmare. Kind of sounds odd when you put out there like that doesn't it?
Now here's the interesting part about the story. To consumers, Adjustable Rate Mortgages (ARMs) are good or bad depending on whether interest rates are rising or falling. When interest rates fall the ARM adjusts down with them. The reverse is true when rates are rising.
As the following highly technical table makes clear, you really, really don't want to be holding an ARM during a rate hiking campaign.
Full article - http://www.marketoracle.co.uk/Article263.html |
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