Friday, August 10, 2007

A snarky look at how the Fed caused the housing-credit bubble in the first place

It’s basically by “counterfeiting” $3 trillion of money over the past few years. This is pretty funny, but with good explanatory value:

• I use $1 trillion to buy stocks (jump starting the bull market)
• I use $1 trillion to buy U.S. Treasury bonds (thus driving bond prices higher and interest rates lower)
• I use $1 trillion to go around to every neighborhood in every major city of the U.S. and start buying houses for 10 percent higher than the listed price.

And you get all these benefits:
• This will create jobs, since lots of employees and consultants will be needed to spend $3 trillion.
• The stock market indices will soar. Everyone's 401(k) and day-trading portfolios will increase in value.
• Home prices will increase by 10% overnight.
• Interest rates will fall which will make it even cheaper for everyone to borrow money to buy new cars, upgrade into a bigger homes, and buy new gas plasma TVs every year hoping against hope of getting to watch the CUBs someday play in the World Series.
• The lifeblood of America, vastly underpaid Real Estate Agents, will get a much needed and well deserved infusion of cash.
• The economy will be humming so fine that no one will care about the loss of jobs to India and China.
• Cheap goods will continue to pour into the US and the CPI will show only a modest 2 percent rise in the price of goods.

Boy, you just can’t beat that, can you?

It does show, in addition, that, although Adam Smith was hugely wrong about his “invisible hand,” he was right on the money about human greed.

Mike Shedlock goes on to say that not just an ordinary recession, but a deflation similar to late 1980s Japan, is very possible. Bill Fleckenstein, another financial analyst who seems to have good insight, agrees.

Personally, I’ve upped my recession odds by Aug. 1, 2008 from 1-3 to 2-5. I’m leaving the Jan. 1, 2009 prediction at 1-2, but those odds will probably get adjusted upward soon.

Oh, and if your 401(k) has any such risk investments, look out.