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US Federal Reserve Bank Loves Bubbles

May 20, 2008
The United States Federal Reserve Bank just can't help itself. It has an apparent love for bubbles, bubbles, bubbles. As soon as one bubble shows signs of deflating the Fed gets busy and creates another.

First it was the Dot Com bubble that was created by the then Chairman of the Fed, the one and only maestro bureaucrat, Alan "Bubbles" Greenspan of irrational exuberance fame. What a spin master. It was Mr. Greenspan whose actions largely created the bubble during the Asian currency crisis of 1997 and 1998. World financial markets were flooded with liquidity as Alan and the Fed panicked and turned on the cheap credit money making machines to flank speed, damn the consequences.

The consequences made a lot of people think that they were rich. At least for a while. Who would have thought that a great deal of that excess liquidity rammed into financial markets would find its way into the stock market and fuel the Dot Com bubble? Certainly not Alan Greenspan. What an era. Twenty something hip techies with a business plan jotted down on a napkin could raise billions over a three martini lunch.

Well, it was fun while it lasted. The downside wasn't so pretty as investors and hard working people who had invested in their companies 401K plans suddenly found the value of their holdings not only approach zero but in some cases hit zero, all within a year or two after the Fed created bubble popped.

After the 9/11 tragedy the Fed once again panicked. This time our esteemed Bubbles guy, good old Alan, brought rates down to 1% and kept them there for a very long time. Oh boy! Another bubble is created. This time a good bit of that excess cheap money found itself into real estate markets. Up , up and away prices went. After all home prices can only go up and up and especially in California, and Florida, and Las Vegas, Nevada, then go up some more, right?

What a party, an orgy really. Homeowners across the nation, thinking they were rich, began to suck billions and billions out of their homes in the form of lines of credit and home equity loans secured by the homes that were increasing in value in the bubble real estate market at the rate of 15%, 20%, 25% and more a year.

This was a great game. You could use your home like an ATM machine and run out and buy a new SUV and a huge flat screen TV. And millions of Americans did just that and more. Surprise, surprise. The combination of larger loan amounts using homes as security and a mass spending spree has caused Americans to now have less equity in their homes than ever before. And this dubious record was achieved during a boom period mind you.

Zoowie! Now that was a really fun party. Its creation lead directly to the sub prime mortgage bubble expansion and the derivatives boom. Party on dude!
About the Author
Gerald "Taipan" Greene is a retired forex trader and portfolio manager who worked in Asia for over 20 years. The nickname was acquired in Hong Kong and is now used for a number of financial, political, and Internet business related blogs. One of them is at Taipan Investor Financial
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