Inflating the Next Bubble

By
Services for Real Estate Pros with TheHousingGuru.com

In the beginning of the first George W. Bush administration the U.S.  was experiencing the aftershocks of what is referred to as the “the bursting of the dot com bubble,” the collapse of tech stocks. Wanting to avoid beginning an administration with a serious economic downturn, the President, in concert with his financial advisers, decided to cut taxes and pump money into the economy as a means of avoiding recession.

 

Their strategy seemed to work. As the country drifted into an eight month recession—near the end of which September 11th occurred--Fed Chairman, Alan Greenspan, lowered interest rates and the economy, after struggling to find its footing, began a long upward climb. The administration had postponed the recession by inflating the next bubble.

                                                                                                                                                    baloon

The first Bush tax cut provided a significant stimulus, and easy money was the rule. Investors—and many pseudo-investors—jumped on the bandwagon, driving stock prices upwards. Many chose to put their money into real estate, for how could you lose? There were occasional warnings during this time, but no one took them seriously. Few imagined that the bubble could burst, for we’d all been taught to buy real estate, it can only go up. More than a hundred years ago, Will Rogers had reminded us, “They’re not making it anymore.”

 

The real estate bubble began to inflate. No doc, adjustable rate, interest only, and no down payment loans became the norm, and billions of dollars flowed into the housing market causing home prices to skyrocket. The ever-increasing prices brought in wave after wave of new investors, many from foreign countries. Homeowners, flush with a new source of capital, their homes ever-growing equity, saw it as a source of additional income. Banks encouraged such borrowing, filling the airwaves with offers to loan up to 125 percent of a home’s value. The “Home ATM” was created.

 

By 2006, however, danger signs had emerged, but most chose to ignore them. Even if the economy were to experience a correction, how bad could it be? Newly appointed Fed Chairman, Bernanke offered his “expert” opinion that housing would enter a moderate slowdown but would avoid a crash.

 

As we rolled into 2007, some economists expressed concern that the growing housing crisis would spread into the broader economy with dire consequences; however, Bernanke continued his optimism, stating, “Even as the housing industry stumbles through its correction, major financial institutions should be spared . . . we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market.”

 

So the question for us now is: Have we begun  inflating the next bubble? With the government borrowing and spending as in past recessions—on a much grander scale, of course—are we setting ourselves up for a great reckoning? Are the artificial highs on Wall Street only a response to the government’s tacit support of the markets?


The Fed has pumped trillions of dollars into our economy, bailing out banks, insurance companies, investment firms, taken over auto manufacturers—companies “too big to fail.” But will their approach restore us to sound financial footing, or could it be that we are inflating the next bubble, one which might one day cause a bursting of Titanic proportions? While I try to see a solution, to avoid a defeatist attitude, I am skeptical of the current strategy. Borrowing our way to prosperity, a policy that defies common sense and logic, is one which experience has shown to only postpone the inevitable pain.

 

The Housing Guru: The expert source for all your housing questions

close

Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Kevin Robinson 08/02/2010 02:20 AM
Topic:
ActiveRain Community
Groups:
Dedicated Bloggers
Silent Majority
The Ninety-ninth Percentile
Tea Party
Voice of Reason
Tags:
housing bubble
recession
government interference
economic crisis

Post a Comment
Spam prevention
Spam prevention
Show All Comments
Ambassador
2,737,237
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

No need to worry about inflated stock market growth, the Jan. rise in dividend and cap. gains tax will take the air out of that bubble.

 

Jul 31, 2010 11:10 PM #8
Rainer
191,456
Jon Budish
Resident Realty - Fort Collins, CO

I believe a day of reckoning is imminent. To add insult to injury, most of the borrowed money the regime is spending is being directed to special interests (unions etc.) where there is no accountability.

Aug 01, 2010 01:46 AM #9
Rainmaker
455,517
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Terry - You're more optimistic about the "reforms" than I am.

Pamela - I have a $100 Trillion bill from Zimbabwe; hope we don't go there.

Lenn - What concerns me about the stock market is that we may pull in lots of small investors once again, just before a crash, and then pull the rug from under them.

Jon - I agree.

Aug 01, 2010 04:49 AM #10
Ambassador
890,780
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

The reforms are what is growing the government bubble, and when that crashes, the gold Bubble might come soon after... 

Aug 01, 2010 03:33 PM #11
Rainmaker
455,517
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Lane - It seems one bubble begets another.

Aug 01, 2010 03:58 PM #12
Rainmaker
383,094
Kevin Robinson
Twin Falls, ID
Fractional Developer

Featured in Tea Party and reblogged!

I believe we have many more bubbles to go.

Aug 02, 2010 02:20 AM #13
Rainmaker
455,517
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Kevin - Unless and until the government comes to the realization that Main Street always loses in a bubble. Of course they already know that and just don't care.

Aug 02, 2010 06:39 AM #14
Ambassador
890,780
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

John, I think you are right about one bubble starting the next.  As people run from one, they create the next "safe haven" that will become a bubble...

Aug 02, 2010 04:20 PM #15
Rainmaker
455,517
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Lane - And the government encourages bubbles; it's the only way to keep the Ponzi scheme going.

Aug 03, 2010 02:48 AM #16
Rainmaker
1,839,304
Jay Markanich
Jay Markanich Real Estate Inspections, LLC - Bristow, VA
Home Inspector - servicing all Northern Virginia

That's a solid analysis and some good thinking in advance John.  Yes, the bubble is coming - it is debt.  And servicing therewith.  Our current debt (before health care, cap and tax, finreg, etc.) is compounding at 7% per year.  WE are not growing our economy at that rate, and therefore are getting behind-er.  That debt reckoning, to use your word, will be Titanic.

Aug 03, 2010 01:45 PM #17
Rainmaker
455,517
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Jay - It is reaching the "tipping point," and once it does, we're in big trouble.

 

Aug 03, 2010 03:38 PM #18
Rainmaker
354,688
Dale Terry
Yadkinville, NC

When all the morons have to face up to their debt, they will come up with a new scheme to "forgive" that debt.  There is no way to pay for it, just forgive it. But each country that wants in will have to give up it's personal freedoms to a world order.  Maybe just fantasy, maybe not.

Aug 07, 2010 06:22 AM #19
Rainmaker
455,517
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Dale - You point out one of the dangers we currently face.  There must be a stopping point for bailouts and rescues.  And we've reached that point. 

Aug 08, 2010 11:58 AM #20
Rainer
177,550
David Evans
RE/MAX TOWN AND COUNTRY - Cumming, GA
HUD NLB Cumming GA

All I can say to the point you make quite effectively, is that to make more worthless paper to resecure more worthless paper is an outcome that is easy to forecast...

P1010467--s

Aug 14, 2010 09:42 AM #21
Rainmaker
455,517
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

David - I agree.

Aug 14, 2010 12:56 PM #22
Rainmaker
1,822,022
Michael J. Perry
KW Elite - Lancaster, PA
Lancaster, PA Relo Specialist

Personally we need to keep cutting expenses and retire debt, but as more unprepared consumers suffer huge loses it could get real scary out there !!!!

Aug 18, 2010 01:37 AM #23
Rainmaker
455,517
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Michael - There are still lots of consumers living on their credit cards. 

Aug 18, 2010 03:28 AM #24
Rainmaker
108,609
Kevin Hancock
Evergreen Home Loans - Poulsbo, WA
The Hancock Mortgage Team

Great post!  I guess I found it a little late, but I believe the next bubble is in the Bond market.  I also think Gold may be overbought as a previous comment stated.  When they are collecting jewelry (there's a new store at our local mall!) to melt down, that's a bad sign.

Oct 19, 2010 01:05 PM #25
Rainmaker
455,517
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Kevin - I think you're on to something.  The next few weeks will be interesting.

Oct 19, 2010 03:03 PM #26
Ambassador
1,621,752
Joe Pryor
The Virtual Real Estate Team - Oklahoma City, OK
REALTOR® - Oklahoma Investment Properties

We narrowly avoided the greatest depression the world had ever seen. One of the ways was an unprecidented stimulus from the worlds countries and banking institutions. If it was for Quantitative Easing the is industry wouldn't recover. But technology matched up with greed will cause another bubble in some other asset class so a government bubble has not happened and is not where the real trouble lies. 

Mar 01, 2014 06:54 AM #27
Post a Comment
Spam prevention
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainmaker
455,517

John Mulkey

Housing Guru
Ask me a question
*
*
*
*
Spam prevention