From Prudent Bear, by Ron Peebles:
How I would have blown a housing bubble – if I had done it
Or: Confessions of a former Fed Chairman
People are always asking me about bubbles. Like do I believe in bubbles? And how do you blow them?
Well, I’m not sure I have all the answers on bubbles. I’m just a former central banker who spending his twilight years playing bridge and looking at the correlation coefficients of economic variables. Typical retirement stuff. So when it comes to bubbles, I don’t know. A few years ago Beannie Babies got a little out of hand, but you know, the market is the market and who’s to say what’s a fair price?
Back in the day, some people thought I had the power to make things happen, you know, like I was Bono or something. If you want to know the truth, I spent a lot of time sitting around a big table shuffling boring academic papers and wondering why the hell we couldn’t get some decent coffee.
But if I were to think about it, I guess I could come up with some ideas about how to make a bubble. Just off the top of my head, for example, I would lower short term interest rates, you know so people would buy more stuff. That might get things to perk up a bit.
That might get things cooking, but maybe not so bubbly. So next I’d lower interest rates some more. And I’d keep lowering them until people decided that apartment living was for suckers and that they should run out and buy a house ASAP. And, people already in a house would think that they deserved a bigger house, figuring that if their brother-in-law can buy a three-thousand square foot Colonial with a pool, why can’t they? And what better time to buy than when rates are low?
So then you have people already in houses wanting houses, and you have apartment people wanting houses, and a lot of those houses are new houses, that gets the homebuilders building because suddenly there aren’t enough new houses to go around.
And once homeowners discovered that just by sitting in their living rooms watching “Lost” they were creating wealth, pretty soon they’d figure out that they could borrow against that new wealth. They would build new kitchens, and add bathrooms, and maybe even add on a room to the garage to store that table saw they just bought on credit.
Pretty soon, some speculators are making so much money that get become cover stories on personal finance magazines, and thus, role models to millions. Eventually, people get so used to housing prices going up so fast that they begin to think that’s what housing prices are supposed to do, and if they hadn’t been so busy working they would have become housing speculators years ago. But better late than never.
And at this point, I’d say you’ve got a pretty good bubble going. I mean, if I were to guess.
Anyway, I sure wouldn’t want to be around when it was over.