Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Greenspan took care of keeping interest rates low. This bred a series of asset bubbles, culminating in the real estate bubble which began deflating in 2007

No, no, no, no.

Relaxation of lending standards and margin requirements make bubbles. Low interest rates have nothing to do with it. You get bubbles at 7 % rates. You get bubbles at 3 % rates. You get bubbles at 0 % rates. Hell, the broker's rate touched 12 % for a while during the spring of 1929. When you have that sort of short-term returns to speculative activity, fiddling with the rediscount rate barely amounts to a rounding error.

Yes, you can kill a debt bubble by jacking up interest rates, in the same way that you can kill inflation by jacking up interest rates: By killing your economy so dead that nobody has the confidence required for price increases or borrowing. That is the stupid way to do it.

The smart way to do it is by jacking up margin requirements, because that leaves interest rates unchanged for viable borrowers and sends them through the roof for Ponzi scams.

The "low interest rates lead to bubbles" narrative is a right-wing narrative. You do not want to push that. The reality-based narrative is "low margin requirements lead to bubbles."

Greenspan fueled the bubble by cheerleading on the bubble, by lobbying against all meaningful regulatory reform, by failing to police the Fed's member banks. He did not fuel the bubble by not killing the American economy completely dead in 2003, any more than convenience store clerks encourage robberies by not having capsules of sarin gas under the counter.

It was not until 2009 that the precious metals markets took off -- after too many people caught on to the manipulation of precious metal prices and the vulnerabilities this created, especially in the silver market, where, allegedly, many times the world total availability of silver bullion has been sold short, setting the stage for a short squeeze.

What is it with the goldbuggery? Who cares about the precious metal market? Precious metals don't have nearly enough industrial applications to be critical to the actual production of goods and services.

Everybody who's been paying attention knows the stock markets and the precious metal markets are being played. But of all the places the compulsive gamblers who missed the Vegas exit and drove on to New York can get their fix, let it be the precious metal markets. They do far less damage there than when they're gambling with ForEx or rice futures.

Just please don't base public policy on their antics.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 26th, 2011 at 11:54:32 AM EST
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