Next bubble?
What’s the next bubble?
In the 80s and early 90s, our government started dismantling all the FDR to LBJ era regulations that kept our economy from hitting deep highs and lows. That enabled the speculative rush into the stock market during the 90s and the bubble that resulted from it. We hit a recession in 2001 that was worsened by 9/11, but rather than take the full reckoning that was due, our government intervened to create another bubble. The federal reserve lowered interest rates to unprecedented lows for the modern era. The government gave massive tax cuts to the wealthy. Both of these things pumped a ton of liquid cash into the economy. The low interest rates and the gutted regulation started another boom in real estate. First, it was just people refinancing higher interest loans and cashing out some modest equity. The lower monthly payment plus the infusion of cash was good for consumer spending. Unfortunately, other people saw their friends “cashing in” and wanted to get in on the same game. Low interest rates and easy access to credit pushed people into home ownership who probably wouldn’t have normally purchased. That drove up prices and the bubble started to inflate. Just as had happened with the stock market, the whole economy turned into a giant pyramid scheme. Those who got in early made a lot of money. Those who got in later just had to hope that they got in early enough not to be left holding the bag when it ended.
This bubble has ended and its consequences will be dire unless our government and economic leaders are able to intervene. They’ve shown some willingness to do that. The fed has bailed out hedge funds by pumping a little more liquidity into certain capital markets. Even George W. Bush seems willing to help out homeowners by easing the limitations on who can refinance their existing loans with the FHA. These things can certainly lessen the effects of the reckoning, but it’s long overdue. I strongly doubt that our leaders have the ability to engineer a “soft landing”. Remember, it was their attempt to engineer a “soft landing” in 2001 and 2002 that caused this bubble.
So, does anyone have any thoughts on what bubble will be created by the steps put into place to deal with this bubble?
