September 25, 2007

Blowing bubbles

Bernanke says the losses in the housing sector are worse than anyone would have thought, and that it's going to take a while to work through it. Indeed, judging by the repercussions of Japan's real estate crisis, at least a decade, with lasting effects on the psyche (and treasury). So that is not really what the Fed is planning to do. Just as with the last bubble deflation, financial policy is geared towards keeping everything moving along. That means, running the nation on credit as there are no untapped reserves of cash (savings) to be spent. But to do that, one can't just deflate an asset bubble - it brings into question the very basis on which credit is extended - another bubble needs to be created. That's how the soft landing after the stock market crash was created - by creating (or at least aggravating) the housing bubble. Except that there really isn't that much else you can create a serious bubble on. Perhaps bonds?


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