Irrational Exuberance Returns
Hussman offers a sobering analysis of the Fed’s massive QE2. There’s a lot of technical language, but here’s what it boils down to:
In short, the main effect of QE2 has not been monetary but has instead been rhetorical – and that rhetoric may very well be nearly empty.
The key event related to QE2 wasn’t its formal announcement, but was instead the Op-Ed piece that Ben Bernanke published a few days later in the Washington Post, which essentially advanced the argument that the Fed was targeting a “wealth effect” in stocks and other risky assets, in hopes of getting people to consume off of that perceived wealth. At that moment, Bernanke unleashed a speculative bubble in risky assets, and a selloff in safe ones. This has rewarded risk-seeking and punished risk-aversion, but it has also unfortunately driven the markets into an overvalued, overbought, overbullish, rising-yields condition that has historically ended in steep and abrupt losses.
Take away the recent QE2-fueled stock market “rally,” and the great Housing Bubble of the Naughts, and the Dot Com Bubble of the Nineties, and I’m hard-pressed to remember a time we had any real, honest growth.
Do you remember?
The .com bubble definitely included real growth, and the housing bubble probably did. We have been getting richer, more technologically advanced, and all that fun stuff for the last 20 years. It’s just that the rational exuberance has been completely overshadowed by the irrational.
Agreed, the dot.com bubble represented the typical over-excitement of a new industry. The housing bubble was just a bubble, nothing new except a government program to expand the pool of buyers.
The housing bubble also produced real valuable assets. It’s the debt bubble that continues to cause us pain. Foreclosure aren’t happening fast enough. People are paying too much interest (ie, they have no discretionary income), rules prevent them from getting current rates. People are unable to save and invest adequately. Housing may fall further, but it is already below replacement cost.
The population is continuing to grow, and we’ve actually been under-building by more than we over-built during the housing bubble.
My brother has an excellent article up at Seeking Alpha. He sees housing picking up in several years and accelerating recovery.
“which essentially advanced the argument that the Fed was targeting a “wealth effect” in stocks and other risky assets, in hopes of getting people to consume off of that perceived wealth.”
Do understand this correct, that the Fed wants us to spend, on credit, backed up by our assets? Haven’t we been doing that for a long time, which has gotten us into the pickle we are in?