“Jim Williams, executive vice-president of the Northern Virginia Building Industry Assn., knew the “feeding frenzy” had gotten out of hand when a waiter in a restaurant he frequents confided that he had bought four houses on spec”

BW: Bubble, Bubble — Then Trouble

Famous economist John Kenneth Galbraith writes in his book “A Short History of Financial Euphoria”:

“Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang.”

Good article in the WSJ describing Ben Bernanke’s fascination with the Great Depression. His assessment is, apparently, that the Fed failed to print enough money to avoid deflation. The rising real value of debt in a deflationary environment where interest rates could not go below zero then crippled purchasing power and thence the economy.

This means that, for sure, he will send out the helicopters to drop money on street corners as threatened.

In the 1930’s, wages remained high in an uncompetitive US. Given the Bernanke path, it looks like the dollar will be depreciated so as to lower real wages while accelerating commodity price inflation.

WSJ: Long Study of Great Depression Has Shaped Bernanke’s Views

From Bill Fleckenstein, quoting an unnamed friend: “Ip writes: ‘While some have criticized him for saying in 2002 the Fed could print money to end deflation, the comments typify his willingness to question orthodoxy.’ Oh, no, they don’t. What his comments actually typify is Bernanke’s own brand of orthodoxy, at the root of which is an arrogant belief that a central bank can lead a market economy around by the nose. By manipulating the funds rate, says the Maestro-designate, the Fed can fine-tune the measured rate of inflation, promote full employment and assure financial stability. For Bernanke, booms have nothing to do with busts. The common-sense theorists of the so-called Austrian School (including Hayek and von Mises) might as well never have been born.

“Robert Cayouette, a computer programmer, has put down deposits on 10 homes under construction in Florida, figuring he’d quickly flip them and make a profit of about $30,000 apiece. The first of those purchases, a three-bedroom home in Port St. Lucie, is expected to close this month. But Mr. Cayouette has learned he’ll be lucky if the house fetches $285,000, or $10,000 less than his original purchase price. “I wouldn’t be able to flip it if I wanted to,” says Mr. Cayouette.

With home prices growing faster than rental rates, investors who decide to rent out their properties rather than sell them often can’t make enough to cover mortgage payments, taxes and other costs. Arash Yazdi, an information technology consultant, decided to rent out his $465,000 townhouse in Merrifield, Va., this fall after a deal to sell the home fell through. He figures he’s losing about $1,000 a month.”

WSJ: Investors Retreat From Housing Market

In 2004, according to the US Treasury, US Government liabilities increased by $11.0 trillion (page 11 here). Against a $11.7 Trillion GDP. So the federal government is actually spending everything.