Sunday, June 12, 2005

Mr. Bubble

According to an editorial in today’s New York Times, Alan Greenspan is “Mr. Bubble”.

The Times thinks that Greenspan kept rates too low for too long and thus helped to inflate a housing bubble in the USA. From this one might imagine that the NYT editors think the cure for the bubble is continued increases in interest rates; after all, “bubbles” are bad and if they are inflated by low rates then they can be deflated by raising interest rates.

But reading on we find that the Times also thinks that low mortgage rates are a sign of weakness in the economy. So one must conclude that the Times thinks the thing to do in the face of economic weakness is to raise interest rates! Hmmm!

Of course, I don’t look to the New York Times for my economic analysis. Instead I look to the Times for a read on elite opinion and that is usually a good starting point for thinking along contrary lines.

Let’s take a closer look at the “Mr. Bubble” editorial. The NYT thinks that low long term interest rates are a sign that the economy is or soon will be sliding downhill. Here are some interesting quotes:

“[The] economy …is not doing as well as Mr. Greenspan suggests.”

“[The] economic outlook is worrisome.”

“[The} federal budget [is] deep into the red, setting the stage for slower growth”.

“”Meanwhile, it is hard to take Mr. Greenspan’s reassuring talk about the economy seriously when there is so much evidence to the contrary.”

The Times suggested “cure” for this economic weakness is higher interest rates and higher taxes! Yikes!!!

My own view is that relatively low long term interest rates are a sign of the bond markets’ confidence that inflation will remain low for the foreseeable future. Low rates also mean that the pool of global savings is large and growing. Savings are the fuel for economic growth. This together with the fact that stock prices have gradually risen in the face of a two year tightening program by the Fed tells me that the economy is in good shape and will continue to strengthen.

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