Krugman: Running Out of Bubbles (Overpriced Housing Bubble)

[RamboLiberal]

http://www.nytimes.com/2005/05/27/opinion/27krugman.html?hp=&pagewanted=print

Remember the stock market bubble? With everything that's happened since 2000, it feels like ancient history. But a few pessimists, notably Stephen Roach of Morgan Stanley, argue that we have not yet paid the price for our past excesses.

I've never fully accepted that view. But looking at the housing market, I'm starting to reconsider.

In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. "There is room," he wrote, "for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing."

As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.

[northzax]

1. wow, that's interesting

seems a bit of a stretch to go with conspiracy, but I guess...

[phantom power]

3. Not exactly a conspiracy.

In a sense, it's part of the Fed's job to manipulate the economy. The question is whether they do it wisely, or foolishly.

[swag]

2. Roach and McCulley, two of my favorite economists.

Neither a free market fetishist, each a realist.

A taste of Roach:

http://www.morganstanley.com/GEFdata/digests/latest-digest.html

And a bit of McCulley:

http://www.pimco.com/LeftNav/Late+Breaking+Commentary/FF/2005/FF+May+05.htm

on edit: Robert Shiller, who exposed the Bush private account scam as the rotten margin loan deal it is, also makes the cut. Huzzah.

[Submariner]

4. After reading their scribes

I feel like I'm just a few puter keystrokes away from transferring ALL my cash out of 401(k) stock funds into a money market fund so I don't have to suffer an impending dive.

I wish I was more financial adviser-like savvy to know exactly what to do, but those guys got my attention. Thanks for the post, always learning something at DU.

Oh....what to do :eyes:

[swag]

5. Yeah, it's a poser.

I'm sticking with my target allocation which is basically a
hybrid of Malkiel's recommendation in "A Random Walk Down
Wall Street" and the one in Siegel's "The Future For
Investors."  But your mileage may certain vary:

Int'l Stocks	24.00%
US Large-Cap	25.00%
US Small-Cap	11.00%
Bonds	        30.00%
REITs	        10.00%

It's mostly in low-cost index funds (mostly Vanguard), with a
good chunk of DVY (an exchange-traded fund) to add dividend
yield and value to the US stock component.

The Bonds are mostly in inflation-protected securities,
including a healthy dose of series I savings bonds, which
won't be subjected to the sorrows of the open bond market.

I'm not a professional; this is just what I'm doing.  Best to
you.  Some would say that's way too much in bonds, that REITs
are bubblized, blah blah blah.  The bond level is just what I
choose for my risk-profile.

[Submariner]

6. Thanks for your insightful info swag

I need to study my percentages and risk more in weird times like these.

[swag]

7. Oh, any time.

There are some model portfolios that I like in one of the appendices of this book:

http://www.amazon.com/exec/obidos/tg/detail/-/039332639X/qid=1117222294/sr=8-2/ref=pd_csp_2/002-2233077-2013637?v=glance&s=books&n=507846

A lot of wags and pros (brokers, fund managers, and portfolio managers), and even DU posters hate Malkiel because he undermines the basis for their being in business at all, but I have found him persuasive. I'm not trying to beat the market, just achieve some goals.

Anyway, I wish you well, and I'll see you around the board.

[grasswire]

8. I'm seeing some crazy stuff...

...that looks like a propaganda effort in the last few days to encourage Americans to buy houses right now, over their means. Example: the AOL welcome screen showcased a top story headlined something like "you can't afford NOT to buy right now" -- people are being stampeded out of fear that prices will keep skyrocketing.

It's shameful.

[elehhhhna]

9. Seems like "Credit Bubble" would also be an appropriate description