Leithner Letter Nos. 108-110
26 December 2008 - 26 February 2009

The government’s policy [is creating] a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing. Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall.

Former Congressman Ron Paul
< a href = "" target = "_new" > Government Mortgage Schemes Distort the Housing Market < /a>
 (16 July 2002)

House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas. House prices are unlikely to continue rising at current rates. However, as reflected in many private-sector forecasts such as the Blue Chip forecast mentioned earlier, a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.

Ben S. Bernanke
Chairman, President’s Council of Economic Advisers
Testimony before the Joint Economic Committee
(20 October 2005)

For the first time in more than 70 years, a psychological “contagion” is threatening to drive financial concerns out of business, but this time American International Group Inc., Washington Mutual Inc. and others are facing a shareholder run. Some economic historians say a sporadic wave of bank failures in 1930 triggered contagion, as depositors pre-empted similar failures of their own banks and perpetuated the crisis by demanding their money. In a series of bank runs, lenders fell like dominoes throughout the early 1930s, and the resulting tightening of credit contributed to a lasting recession.

Richard Bernstein, chief investment strategist at Merrill Lynch, said …“What people still are missing is that every growth story of the last five to ten years has been based on credit. China, commodities, real estate, hedge funds, everything was a capital-intense endeavour. Global growth was the symptom of the credit bubble,” he said.

“Shareholders Run, Much Like Depositors Once Did”
The Wall Street Journal (16 September 2008)

At first I thought we could deal with this – deal with the problem one issue at a time. We made the decision on Fannie and Freddie because there was systemic risk to our mortgage markets. And then obviously AIG came along, and Lehman came along and it was – it declared bankruptcy; then AIG came along and it – the house of cards was much bigger, beyond – started to stretch beyond just Wall Street, in the sense of the effects of failure. And so when one card started to go, we were worried about the whole deck going down, and so therefore moved, and moved hard.

And I believe this is going to work. We had the considered judgment of a lot of capable people. It’s not only just here in Washington, but our people were listening to a lot of other voices. And we took our time to come up with a strategy and a plan that would address the problem. And you bet it’s big, because it needed to be big.

President Bush’s Remarks on the Economy
(21 September 2008)

Once Again, Marxism Fails Miserably:
Long Live Marxism?

Are financial markets falling, or is the sky? At the moment the answer is debatable. During September and the first half of October, comparisons between current conditions and the early phases of the Great Depression filled the newspapers and airwaves. In the 12 months to 10 October, financial markets in Australasia, North America and Western Europe suffered mark-to-market adjustments averaging 39%. In Australia, the loss of 42% greatly exceeds those incurred during the Crash of 1987 and the recessions of the early 1990s and 1980s, as well as many of the losses incurred during the Depression. The worst-ever annualised result since the birth of the All Ordinaries Index in January 1875 is the -43.5% in the twelve months to 30 September 1930 (which pipped the -41.6% of August 1974 and the -40.6% of September 1974). In the U.S., the DJIA and S&P 500 have plunged more in the past year than at any time since the “Depression-Within-the-Depression” of 1937-38.

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Chris Leithner


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