Discussion in 'Trading' started by Digs, Dec 11, 2007.
ha ha ha ha
My mistake was I never got rich off the first three...
I hope I am rich after the lucky last...
what about the commodity bubble.
Digs - thats a nice chart you posted above. People tend to hate bubbles because they either deny the trend and fade it or the get in right when its about to end. But bubbles are a natural part of the business cycle and play a very healthy role in the economy. During a bubble in a sector the sector receives the cash infusion it needs to promote more entreprenuership, risk taking, and innovation in that sector. Then the money flows out and into another sector. These sectors oscillate between being over and under funded and everything finds its equilibrium in this manner.
How are you going to trade the emergant liquidity bubble? I'm going long the 10 year note.
Don't Blame the Market for the Housing Bubble
by Ron Paul
March 20, 2007
The U.S. housing market, long considered vulnerable by many economists, is now on the verge of suffering a serious collapse in many regions. Commodities guru and hedge fund manager Jim Rogers warns that real estate in expensive bubble areas will drop 40 or 50%. Mainstream media outlets like the New York Times are reporting breathlessly about the possibility of widespread defaults on subprime mortgages.
When the bubble finally bursts completely, millions of Americans will be looking for someone to blame. Look for Congress to hold hearings into subprime lending practices and âpredatoryâ mortgages. Weâll hear a lot of grandstanding about how unscrupulous lenders took advantage of poor people, and how rampant speculation caused real estate markets around the country to overheat. It will be reminiscent of the Enron hearings, and the message will be explicitly or implicitly the same: free-market capitalism, left unchecked, leads to greed, fraud, and unethical if not illegal business practices.
But capitalism is not to blame for the housing bubble, the Federal Reserve is. Specifically, Fed intervention in the economy â through the manipulation of interest rates and the creation of money â caused the artificial boom in mortgage lending.
The Fed has roughly tripled the amount of dollars and credit in circulation just since 1990. Housing prices have risen dramatically not because of simple supply and demand, but because the Fed literally created demand by making the cost of borrowing money artificially cheap. When credit is cheap, individuals tend to borrow too much and spend recklessly.
This is not to say that all banks, lenders, and Wall Street firms are blameless. Many of them are politically connected, and benefited directly from the Fedâs easy money policies. And some lenders did make fraudulent or unethical loans. But every cent they loaned was first created by the Fed.
The actions of lenders are directly attributable to the policies of the Fed: when credit is cheap, why not loan money more recklessly to individuals who normally would not qualify? Even with higher default rates, lenders could make huge profits simply through volume. Subprime lending is a symptom of the housing bubble, not the cause of it.
Fed credit also distorts mortgage lending through Fannie Mae and Freddie Mac, two government schemes created by Congress supposedly to help poor people. Fannie and Freddie enjoy an implicit guarantee of a bailout by the federal government if their loans default, and thus are insulated from market forces. This insulation spurred investors to make funds available to Fannie and Freddie that otherwise would have been invested in other securities or more productive endeavors, thereby fueling the housing boom.
The Federal Reserve provides the motherâs milk for the booms and busts wrongly associated with a mythical âbusiness cycle.â Imagine a Brinks truck driving down a busy street with the doors wide open, and money flying out everywhere, and youâll have a pretty good analogy for Fed policies over the last two decades. Unless and until we get the Federal Reserve out of the business of creating money at will and setting interest rates, we will remain vulnerable to market bubbles and painful corrections. If housing prices plummet and millions of Americans find themselves owing more than their homes are worth, the blame lies squarely with Alan Greenspan and Ben Bernanke.
Dr. Ron Paul is a Republican member of Congress from Texas.
Business cycles existed before the Fed. Assigning causality to the Fed is not very accurate. How much they modify/distort the real cycle is not something I ever tried to figure out... but it would be a fun project. They are as much a symtom as a cause since they are caught up in their own dilemmas.
This subprime thing is something else though... Like I posted before, I know a coke head guy that made a killing hustling subprime loan business the last couple of years. He is my model for the subprime loan industry, a coke head with a voracious appetite for money. So this industry packages the loans into another entity along with some good stuff, cleans it up a bit as it were, then makes a derivative from that, the ratings guys give it AAA rating and it is sold as the most solid investment derivative all over the world!! That is almost as funny as the academic that came on this site and "proved" that trading is non profit... on a site owned by guys that made a significant fortune trading
Flight to saftey : USD 30 yr bonds
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