Once again, not his fault

The Wall Street Journal reports($) on another Alan Greenspan sighting where the former Fed chairman once failed to make the connection between basic human instincts and easy money policies by the central bank.

Mr. Greenspan, Fed chairman from 1987 to 2005 and now a private consultant, said business expansions are driven by euphoria and contractions by fear While economists tend to think the same factors drive expansions and contractions, ."the expansion phase of the economy is quite different, and fear as a driver, which is going on today, is far more potent than euphoria."

The euphoria in human nature takes over when the economy is expanding for several years, and leads to bubbles, "and these bubbles cannot be defused until the fever breaks," he said.

Bubbles can't be defused through incremental adjustments in interest rates, Mr. Greenspan suggested. The Fed doubled interest rates in 1994-95 and "stopped the nascent stock-market boom," but when stopped, stocks took off again. "We tried to do it again in 1997," when the Fed raised rates a quarter of a percentage point, and "the same phenomenon occurred."

"The human race has never found a way to confront bubbles," he said.

Apparently, this is just how the world works - one bubble after another.

The rampant creation of money and credit along with encouraging an entire generation to take on more risk have nothing to do with the financial bubbles that now seem to come and go regularly.

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Hu's your daddy?

It is less than completely reassuring to read that President George W. Bush is somehow involved with managing relations with China.

"Our relationship with China is complex," Bush said Wednesday.

Bush suggested China could help reduce trade imbalances and allow its currency to be more responsive to market influences.

"We still have got a huge trade deficit with China, which then causes us to want to work with them to adjust — to let their currency float," Bush said earlier. "We think that would be helpful in terms of adjusting trade balances."

Dan Price, a presidential international economic adviser, said "a whole range of economic issues, bilateral issues with China, are obviously on the table, and would naturally be subjects of discussion between the two presidents." Exchange rates are "a very important issue" to both countries, he said.

Analysts say China's yuan is undervalued, giving Chinese exporters an unfair advantage despite China's steps to revalue the currency by 2.1 percent in 2005 and then letting it appreciate a further 7.3 percent.

U.S.-Chinese tensions have also grown over the issue of defective products. Just Wednesday, Mattel Inc. announced a third major recall of Chinese-made toys in little more than a month because of excessive amounts of lead paint. The world's largest toy maker said the move affects about 800,000 toys.

China has denied reports that its military hacked into a computer system in the office of Defense Secretary Robert Gates in June. Bush largely sidestepped the question on Wednesday, but said, "We understand that we're vulnerable in some systems." The Financial Times, citing unidentified officials, said China was behind the attack that forced the Pentagon to temporarily take down the network. China has called the allegations "groundless."

Meanwhile, a growing number of analysts think that the Chinese are dumping U.S. debt.

A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.

Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone.

"This comes as a big surprise and it is definitely worrying," said Hans Redeker, currency chief at BNP Paribas.

"We won't know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don't seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance at 500 euros," he said.

Somehow, it seems like U.S.-China relations peaked a couple years ago - back when we were more than happy to buy their inexpensive manufactured goods, looking past the defects, and they were happy to buy treasury bills.

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From residential to commercial to government

It looks like a 1990s Japan-style construction shift is now underway here in the U.S. - after bubbles in residential and commercial building, the government becomes the only big spender left standing.

The Japanese government spent the better part of the last decade of the 20th century covering large portions of the country with concrete and it looks like we're about to do the same thing here on the other side of the Pacific fifteen years later.

Two stories in the news today make this scenario seem much more likely. First, this report from Bloomberg on the reluctance of private industry to begin new building projects.

Commercial Real Estate Poised for 15% Price Drop
By Hui-yong Yu and David M. Levitt

U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales.

"People aren't willing to do deals right now," said Howard Michaels, the New York-based chairman of Carlton Advisory Services Inc., which has arranged financing for real estate purchases including the Lipstick Building in midtown Manhattan. "The expectation is that prices will come down."

Investors in July bought the fewest commercial properties since August 2006 and apartment building acquisitions were down 50 percent from June, data compiled by industry consultants at New York-based Real Capital Analytics Inc. show. Archstone-Smith Trust in August postponed its $13.5 billion sale to a group led by Tishman Speyer Properties LP until October. Mission West Properties Inc., the owner of commercial buildings in Silicon Valley, said on Aug. 13 that the company's $1.8 billion sale may fail after a bank withdrew funding.

"There are so many deals falling apart," said David Lichtenstein, chief executive officer of Lakewood, New Jersey- based Lightstone Group, an owner of more than 20,000 apartments and 30 million square feet of office and retail space. "People who can get out are getting out."

This USAToday story chronicles the increased spending by state and local governments, still either flush with cash from the housing boom or able to easily borrow in shaky credit markets.

Building projects fill gap in economy
By Dennis Cauchon, USA TODAY

State and local governments are in the middle of a building boom that has helped keep the economy afloat and offset job losses from the decline in home construction.

The construction of sewer plants, schools, ball fields and other government facilities soared 11.1% in the first four months of the year to a record annual rate of $257 billion, according to a USA TODAY analysis of the most recent Census data.

The fuel for the building spree is the same as it was for the residential housing boom: borrowed money.

State and local governments issued $228 billion in bonds during the first six months of this year, up 28% from last year, Thomson Financial reports.

Tax collections grew a modest 4.7% in the first half of 2007.

Investors have been happy to buy high-rated, tax-exempt municipal bonds as an alternative to the more volatile stocks and mortgage-related investments.

The natural progression is for Washington to take up the slack when the state revenue sources slow or the issuance of new debt becomes less attractive - look for increased federal funding for all sorts of things in the years ahead as the economy slows.

Not that infrastructure improvements would be such a bad thing - you just have to wonder where the money is going to come from.

Property taxes have surely peaked and income taxes may soon follow. Rampant money creation by the federal government is one thing if you are net exporter and creditor nation like Japan, but when you are the world's largest debtor nation, it is quite another.

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Flip this TV genre

After catching a portion of some TV show somewhere in the Midwest a few days ago where a late-twentysomething was showing an early-twentysomething the ropes while tooling around in a black Hummer H2, this LA Times story hits the nail squarely on the head.

Home shows see need to retool
The bubble hasn't burst yet for popular cable programs,
but market woes spur some shifts in focus.

No one has been more swept up in the euphoria of the overheated housing market of the last few years than cable television networks.

First came "Property Ladder" and "Flip That House" on Discovery's TLC and "Flip This House" on the competing A&E Network. As home values soared, so did the number of real estate programs. TLC came up with "Real Estate Pros," and A&E later served up "Sell This House." Bravo jumped into the act this summer, introducing "Flipping Out."

But what happens to all of these house-flipping shows now that the real estate market seems to be tanking?

"The television equivalent of 'location, location, location' is 'timing, timing, timing,' " said TV historian Tim Brooks. "Now that the bust has come, now that the wave has passed, some of these shows might be in trouble."
...
Robert Sharenow, a senior vice president at A&E in charge of nonfiction programming, predicted that programs such as "Flip This House" would endure beyond "this hiccup in the market."

"The show is kind of recession-proof," Sharenow said. "If there are more foreclosures, that will make flipping opportunities more readily available. Even if the profit margins are slimmer, there will still be plenty of challenges and pressure and drama. It turns the heat up on the drama when times are tougher."

Uh, Robert, it might be a bit more than a "hiccup" and, if you're really looking for a "recession proof" theme, you should probably look into health care or prisons.

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