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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Vosilla who wrote (37060)	7/26/2005 11:06:13 PM
From: Mike Johnston	Read Replies (2) \| Respond to of 110194

If Greenspan had guts, he would raise rates to 6-8 % with 50 bp steps. Let coastal housing fall 50%, rather than do nothing and have it fall 90% from a higher level. Let the chips fall where they have to and let everybody go back to their day job of treating patients, discovering medicines, writing software, inventing , producing goods and providing services.

To: John Vosilla who wrote (37060)	7/27/2005 3:33:07 AM
From: Taikun	Read Replies (1) \| Respond to of 110194

<"As for Volker, yes he would have prevented this housing bubble for sure. His medicine is hardly the cure right now. Imagine 7% interest rates. Instant depression?"> Actually I think the higher interest rate would dissuade some of this financial engineering. The entire US economy is becoming a hedge fund and the low CPI distorts GDP. GDP is probably much lower if energy and housing are included in CPI, because of the impact of the GDP deflator. Instead of working people are flipping houses and companies can't find staff that are willing to put in a good day's work. If I can take a chunk of cash out of my home and reinvest, and take on margin, putting money into high yield bonds, and other high yield instruments such as in energy, I don't need to work too hard. It is too easy to turn oneself into a hedgie. Look at Japan for problems resulting from low interest rates. Part of the problem in Japan is that the threshold for a 'good' return on an investment is now anything more than the bond yield, or 1%. This allows investment to flow to marginal and wasteful projects. (Perhaps the US's presence in Iraq qualifies as one of these projects and necessitates the low interest rates) With a higher interest rate there is some argument to be made that companies and investors take more risks and seek higher ROI projects. There is also the point to be made that some companies can reinvest cash more efficiently than recycling cash in buybacks and dividends to investors who cannot invest as efficiently (even if tax coffers rise due to the effects of the distribution). With low bond yields and investors looking for yield, companies are under pressure to distribute cash to yield hungry investors who would buy treasuries if the yield were 7%. At the same time, the gov't would issue less debt at 7%, because it would be more costly. The Fed is still fighting the last war: inflation, and we are only beginning to come to grips with the problems of the next war.