Mortgage & Loan: The Phantom Menace

Economist Paul Krugman finally puts it all on the table and says what many of us have been thinking--that the crusade against inflation is a big shell game:

It would be an exaggeration to say that there's no inflation threat at all. I can think of ways in which inflation could become a problem. But it's much easier to think of ways in which the Federal Reserve, wrongly focused on the phantom menace of a new wage-price spiral, could be slow to respond to bigger threats, like a rapidly deflating housing bubble.

The reason why wages have stagnated is because of the heavy emphasis on consumer credit and financing a living you can't afford. Housing is key to that, and the result was flooding the market with cheap money, no-interest loans, and relaxed mortgage standards to push people into using homes as ATM machines. Meanwhile, the war in Iraq caused oil prices to spike, which has led to price increases across-the-board due to higher shipping costs--and that was BEFORE the destruction of the oil rigs in the Gulf thanks to Katrina and Rita.

The reasons why people aren't saving are twofold. The economy has encouraged them not to, in every way, thanks in no small part to Greenspan himself. The other reason is that now that people have seen the likes of Enron and such--where average Americans saved, invested, and did everything right, and STILL got burned--they feel as if there's no percentage in putting money aside when it can be destroyed later.

So the cycle of negative spending, credit reliance, and housing gambles continues. We've been bamboozled, misled, and manipulated in a way that would have done Palpatine himself proud. And like Palpatine's pupil Darth Vader, Bernanke may not prove equal to fulfilling his master/mentor's will. Where will that leave us, I wonder?

Posted at June 18, 2006 06:51 PM

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Economist Paul Krugman finally puts it all on the table and says what many of us have been thinking--that the crusade against inflation is a big shell game: It would be an exaggeration to say that there's no inflation threat at all. I can think of ways in which inflation could become a problem. But it's much easier to think of ways in which the Federal Reserve, wrongly focused on the phantom menace of a new wage-price spiral, could be slow to respond to bigger threats, like a rapidly deflating housing bubble. The reason why wages have stagnated is because of the heavy emphasis on consumer credit and financing a living you can't afford. Housing is key to that, and the result was flooding the market with cheap money, no-interest loans, and relaxed mortgage standards to push people into using homes as ATM machines. Meanwhile, the war in Iraq caused oil prices to spike, which has led to price increases across-the-board due to higher shipping costs--and that was BEFORE the destruction of the oil rigs in the Gulf thanks to Katrina and Rita. The reasons why people aren't saving are twofold. The economy has encouraged them not to, in every way, thanks in no small part to Greenspan himself. The other reason is that now that people have seen the likes of Enron and such--where average Americans saved, invested, and did everything right, and STILL got burned--they feel as if there's no percentage in putting money aside when it can be destroyed later. So the cycle of negative spending, credit reliance, and housing gambles continues. We've been bamboozled, misled, and manipulated in a way that would have done Palpatine himself proud. And like Palpatine's pupil Darth Vader, Bernanke may not prove equal to fulfilling his master/mentor's will. Where will that leave us, I wonder?