"The critical issue on the whole subprime, and by extension, the international financial system rests very narrowly on getting rid of probably 200,000-300,000 excess units in inventory"
This was said this morning in a conference with Japanese business leaders. He's referring to housing units here. I've always thought I had a very silly, simplistic view of the global financial system, but does anyone else think this is being overly foolish.
If you will, let's examine some of my odd reactions to what he put forth.
Firstly, it never occurred to me that the dangerous subprime mess present was rooted, solely, in all these excess units that were just in the way. From reading on this site I thought the danger was in big part related to misrepresented risky paper that is still in the market, that nobody wants any part of and that this paper is backing even more investment paper. I understood that all the problems have not come home to roost yet, but was I misinformed?
Is Mr. Greenspan angry because he can't flip his house right now?
Who would have thought that this supply issue would cause such a problem? Never mind the foolish practice of giving away money to anyone as a cause of building up the inventory; it's really just as simple as saying that removing the excess inventory at this moment in time is the solution. Is it so we can keep on going as before with our wise bubble making philosophy, and the world can keep buying safe US mortgage backed debt? Heck, if a few natural disasters are really all that are stopping us from being out of this mess maybe we should just bull doze some houses and save everyone from losing their investments.
Isn't this a strange way of saying to us that we should not borrow to build as much but borrow to buy at ever increasing prices? That couldn't be right, could it?
Well, I'm not helped by the next thing he said today when he urged central banks to avoid suppressing asset bubbles, which he described as "exceptionally difficult" to do. Doesn't it sound, again, like buying ever increasingly pricy homes is what he wants us to do with all the money we borrow with no oversight? My mom doesn't agree with him here; she always says I should not borrow if I don't have to, but shop around and pay less to have more left over. What does she know? After all, she encouraged me to build a house because it was cheaper than buying one already made. She doesn't understand the great value of asset bubbles, obviously! She certainly doesn't "get" that the excess inventory created by my house is pure evil.
To be reassuring he sates that central banks avoid worldwide inflation by maintaining monetary tightness at appropriate levels. That certainly doesn't sound like it's the same philosophy shared by the sub prime lenders, does it? What do I know? At least he thinks that is happening. Thank God we have no inflation in the cost of food and heat!
I do have doubts though. Could it be that Alan Greenspan knows better and that he's just cajoling me and the Japanese folks so he doesn't spook us? Here he has this to say as proof he is right: the global economy is still functioning and the "underlying structure is doing well". Phew! It's just those excess housing units that are causing all this mess and stopping us from humming along. Damn you builders!
Seriously, now I'm worried.
Lastly, he was a realist when he said that the US dollar would continue weakening if technological innovation boosts productivity, standards of living and therefore growth in the region (east Asia).
In essence, the economic tide is coming in somewhere else, isn't it Mr. Greenspan? You tried to encourage bubbly growth here to counter it elsewhere to stop inflation, but it was a foolish unregulated attempt. The easy money did not all go into asset bubbles and we have to deal with excess supply now. People are getting hurt by deflationary pressure created to fight inflationary pressures. That's how I see it. Mr. Greenspan, are you really sure you're an expert?