What to invest in during the housing bubble

Justice Litle - Thu 28 Sep, 2006

...As the eminently quotable Mark Twain observed, denial ain't just a river in Egypt. A sadly ridiculous example of denial has arisen in a recent study from the US Federal Reserve. And it proves that the mass panic about the US housing bubble has everything to do with the price of gold and raw materials...

  
   
As the eminently quotable Mark Twain observed, denial ain't just a river in Egypt. A sadly ridiculous example of denial has arisen in a recent study from the US Federal Reserve.

And it proves that the mass panic about the US housing bubble has everything to do with the price of gold and raw materials.

John Fisher and Saad Quayyum, economists at the Chicago Fed, essentially wish to absolve their institution of all responsibility for the US housing bubble, which now looks sick. To do this, they have declared that clouds are cotton candy and the moon is made of green cheese.

Well, maybe not those words exactly. But the words they used were just as silly. "The housing boom has not been driven by unusually loose monetary policy", Fisher and Quayyum write. "Current levels of spending on new housing are largely explained by technology-driven wealth creation over the previous decade."

Technology-driven wealth creation over the previous decade, eh? Would that be the same wealth that got vapourised in the great dot-com/telecom bust, when a collective $7 trillion went up the flue? And how remarkable that "unusually loose monetary policy" played no role in the great mortgage race!

It must have been something else that got the US banks – just like their friends in Britain - excited enough to offer no-money-down, negative-amortisation loans to anyone with a pulse.

What's worse, the Chicago Fed's finest now deny the validity of the term "bubble", on the grounds that no excessive real estate speculation has occurred. As if single mothers in Vegas buying 19 properties on a $30,000 income is a run-of-the-mill, non-speculative occurrence...As if websites like condoflip.com (slogan: "Bubbles Are for Bathtubs") pop up in sober climes...As if the threat of adjustable-rate mortgages blowing up all over the world's largest single economy is nothing out of the ordinary.

This doltish display would be more amusing if it weren't so damn infuriating. What we have here is an official policy position on par with Monty Python's "Dead Parrot" sketch. (Next, we'll hear that US homeowners are pinin' for the fjords...)

In my opinion, these gentlemen should be dunked in maple syrup, blasted with chicken feathers and ridden out of town on a rail. When agents of a prominent institution choose to deliberately distort reality and obfuscate the past, they rob themselves and others of the opportunity to learn from their mistakes, or indeed to learn from anything.

This mind-set of "All's well, no matter what" fuels a sort of accidental nihilism; when a fantasy world is actively preferred to the real one, and the understanding of the world that actually exists gets eroded and destroyed.

When you think about it, it's more frightening than funny to see an official stamp on this kind of thing. The idea that quasi-governmental officials are now brazen enough to say anything, no matter how outlandish, sends chills down my spine. What happens in the event of a fiscal meltdown, a major terrorist attack or a nuclear exchange? What happens when all branches of government see perpetuating a fantasy as a matter of national security? How far is this from occurring?

Dogged optimism, preferably tempered with realism, is a noble trait. Churchill comes to mind. And it's usually good to reserve some hope, to believe that things can be turned around. But there comes a point when an institution can become so deluded, so philosophically and ethically bankrupt, so riddled with conflict and divorced from reality, that there is nothing to do but wait for the walls to cave in.

It seems a number of today's dominant institutions, including the Federal Reserve, are already at that point.

If so, gold could be the final judge and jury.


Regards,

Justice Litle
for The Daily Reckoning