Collapse scenario: Greenspan makes it official

2005-09-29

Richard Moore

    Earlier this year, Financial Intelligence Report spoke with
    Sir John Templeton, the renowned global investor, who warned
    readers of a significant fall-off in real estate prices - in
    some markets he sees a crash in prices of 50% or more.

    Some economists have criticized Greenspan for failing to stem
    the stocks bubble in the 1990s. He also faces criticism for an
    ultra-low interest rate policy in recent years that some argue
    has fueled speculation in housing.

'Some argue?' - hah!

Creating bubbles, and then bursting them, is a classic way
of bringing down economies. First low interest & lots of credit
(give them enough rope...) and then high-interest and a credit
squeeze (...and we can hang them).

They did it before, in 1929, and they did it to Japan more
recently.

At least Greenspan is nice enough to telegraph his punches.
(to avoid being caught with his pants down, now he can say
"I told you so", although it comes just at the last minute.)

rkm


--------------------------------------------------------
From: "Westaway" <•••@••.•••>
Subject: Uncertainty Over Stability of 'House of Cards'
Date: Wed, 28 Sep 2005 13:50:17 -0700

http://NewsMax.com

Date: September 28, 2005

Time: 11:21 a.m.

Greenspan Warns of 'Euphoria'

In a major speech delivered Tuesday, Federal Reserve Chairman
Alan Greenspan confirmed repeated warnings that have been
issued in Financial Intelligence Report over the past year.

Earlier this year, Financial Intelligence Report spoke with
Sir John Templeton, the renowned global investor, who warned
readers of a significant fall-off in real estate prices - in
some markets he sees a crash in prices of 50% or more.

Other Financial Intelligence Reports followed, including stark
warnings from former Federal Reserve chairman Paul Volcker who
said the U.S. was on the verge of an economic "crisis."

Financial Intelligence Report also cited remarks made by
Warren Buffett, the nation's richest investor, when he warned
real estate prices were grossly inflated. Buffett, who has an
aversion to selling assets, recently sold his California home.
He said prices there had reached astronomical proportions.

Apparently, Greenspan is now worried as well.

In his speech, Greenspan warned investors that they shouldn't
be lulled into a false sense of security by the economy's long
stretch of low interest rates.

"History cautions that extended periods of low concern about
credit risk have invariably been followed by reversal, with an
attendant fall in the prices of risky assets," Greenspan said
in remarks to the National Association for Business Economics
in Chicago.

Greenspan didn't specify what risky assets he was referring
to.

But most agree he is talking about overheated real estate
prices.

The Fed chief has been sounding an alarm for months -
including an emphatic warning on Monday - about the perils to
homeowners and lenders using risky and exotic types of
mortgages.

In his remarks Tuesday, Greenspan repeated worries he has
expressed in the past - that a rise in interest rates may
spell trouble for some investors who are counting on rates to
stay low for an extended period of time.

"Such developments apparently reflect not only market dynamics
but also the all-too-evident alternating and infectious bouts
of human euphoria and distress and the instability they
engender," he said.

Greenspan's "euphoria" remark seems eerily similar to his
remark about "irrational exuberance" that presaged the dotcom
crash - one of the biggest bubbles ever.


http://today.reuters.com/business/newsarticle.aspx?type=tnBusinessNews&storyID=nN27724248&imageid=2005-09-23T221407Z_01_WASG119D_RTRIDSP_2_G7-MINISTERS.jpg&cap=U.S.%20Federal%20Reserve%20Chairman%20Alan%20Greenspan%20leaves%20after%20a%20goup%20photo%20of%20G7%20ministers%20outside%20the%20Treasury%20Department%20in%20Washington,%20September%2023,%202005.%20REUTERS/Yuri%20Gripas

Exuberance always leads to asset drops-Greenspan
Tuesday 27 September 2005, 6:38pm EST

By Tim Ahmann

WASHINGTON, Sept 27 (Reuters) - Asset bubbles fueled by
"market exuberance" invariably burst and policy-makers cannot
safely pierce them, Federal Reserve Chairman Alan Greenspan
said on Tuesday in what some economists took as a warning to
bond market and housing speculators.

In a speech in which he once again defended the Fed's decision
not to deflate the late-1990s stock market bubble, Greenspan
said a successful monetary policy can be a victim of its own
success -- by reducing economic volatility that in turn
fosters greater risk-taking.

He warned that protracted bouts of big risk-taking by
investors are always followed by asset-price declines, and he
said maintaining the U.S. economy's flexibility was essential
to helping it weather the inevitable blows.

"History cautions that extended periods of low concern about
credit risk have invariably been followed by reversal, with an
attendant fall in the prices of risky assets," he told an
economics conference in Chicago via satellite.

"Because it is difficult to suppress growing market exuberance
when the economic environment is perceived as more stable, a
highly flexible system needs to be in place to rebalance an
economy in which psychology and asset prices could change
rapidly," he said.

Prices for both U.S. stocks and government bonds rose a bit
after his remarks as traders showed relief he had not signaled
higher-than-expected interest rates ahead.

The Fed chief, who steps down at the end of January after more
than 18 years, said the U.S. economy's ability in recent
decades to weather a series of shocks -- including the latest
run-up in energy prices -- offered evidence of its increased
flexibility.

"That greater tendency toward self-correction has made the
cyclical stability of the economy less dependent on the
actions of macroeconomic policymakers, whose responses often
have come too late or have been misguided," he said."

"It is important to remember that most adjustment of a market
imbalance is well under way before the imbalance becomes
widely identified as a problem," Greenspan added.

The comments reminded observers of Greenspan's now famous
warning to stock market investors in a 1996 speech not to get
caught up in "irrational exuberance."


EXHAUSTING THE BOOM

Some economists have criticized Greenspan for failing to stem
the stocks bubble in the 1990s. He also faces criticism for an
ultra-low interest rate policy in recent years that some argue
has fueled speculation in housing.

As he has in the past, Greenspan defended the Fed's decision
to wait for the "eventual exhaustion of the forces of boom" in
the 1990s, saying acting aggressively to deflate the stock
market could have led to a "significant recession."

"Whether that judgment continues to hold up through time has
yet to be determined," he said.

He raised the prospect the economy's greater flexibility in
recent years could mean a better economic performance.

"If we have attained a degree of flexibility that can mitigate
most significant shocks -- a proposition as yet not fully
tested -- the performance of the economy will be improved and
the job of macroeconomic policy-makers will be made much
simpler," he said.

Some analysts said the speech appeared in part a "victory
lap," but one in which Greenspan seemed concerned about the
potential for market stress once he leaves office.

"As outgoing Fed chairman, he's clearly concerned about the
asset cycle and the prospect the low concern on credit risk is
going to be associated with a decline in asset prices down the
track," said Alan Ruskin, research director at 4Cast Inc.

Greenspan did not refer specifically to the low risk premiums
evident in the U.S. bond market -- a topic he and other Fed
officials have addressed in recent speeches.

Those low risk premiums have kept long-term interest rates
down, helping underpin swift housing price gains.

In a speech on Monday, Greenspan restated his view that
"froth" was evident in some local housing markets, but said it
was not yet clear if those speculative conditions would reach
across the nation as a whole.

On Tuesday, he said "fostering an environment of maximum
competition" was the best way to ensure economic flexibility.

In that regard, he said it was important to ward off misguided
efforts to try to protect jobs through trade protectionism and
other competition-inhibiting policies.

"Protectionism in all its guises, both domestic and
international, does not contribute to the welfare of American
workers," Greenspan said. "At best, it is a short-term fix at
a cost of lower standards of living for the nation as a
whole."
-- 

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