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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: russwinter who wrote (69963)9/19/2006 5:38:26 PM
From: Mike Johnston  Read Replies (5) of 110194
 
You have hit the nail in the head.
Excellent, excellent analysis, that is why we come to this board, to make sense of the insanity that is getting more extreme by the day.

Here is my take on all this.

The Fed had to undertake extreme measures to mop up bursting stock bubble. They created the biggest housing bubble in history.

Since housing bubble was much wider in scope with bigger wealth effect, bigger distortions and misallocation of capital, the risks derived from its collapse are much larger this time around.

That is the reason they will engage in even more extreme measures to limit the fallout from slowing housing.

Here is what they need to do:

1. Maintain 10% + inflation for the next few years to limit nominal declines in housing prices and to try to increase wages.
2. Maintain stock indexes at a high level to maintain confidence.
3. Lowering long term rates below 4%, most likely to 3.5% to allow many adjustable mortgages to be refinanced at low fixed rates.

Here is how they will do it ( we saw the preview today)

1. Manufacture totally bogus economic reports especially inflation statistics
2. Monetize long end of the curve in collusion with FCB's
3. Collusion with ECB and BOJ to maintain dollar relatively stable.
4. Misinformation campaign and jawboning
5. Periodic energy and gold raids.
6. Provide unlimited liquidity to the financial sphere and Pig Men.
7. To engineer stealth bailouts as needed

The bottom line is this: the game plan of the fed to cushion the economy from the nasdaq burst was to inflate housing. It would be foolish to think that they would not have a game plan now, when housing is done, since the stakes for the economy are much higher.

Their game plan is simple: high inflation and low interest rates.
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