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May 20, 2005
Greenspan speaks to Congress
The speech was about energy, but the questions generated the media interest. I linked to this same Reuters story in my previous post, but it deserves additional comment.
Greenspan acknowledged that China needs to amend its exchange-rate policies for its own good. In order to maintain the peg without sparking inflation, China must "sterilize" the large amount of reserves it amasses in the process of buying U.S. dollars and issuing yuan-denominated debt.
"The trouble with the sterilization issue is that they're only able to sterilize about half of what they are accumulating," Greenspan said, which has the effect of leaving its financial system awash in cash that can fuel inflation.
Precisely. All that extra cash does make their shaky banking situation seem a little less precarious. Taking away that extra cash would really shake things up and has always been a reason that China has been reluctant to float the yuan. Once inflation begins to pose a greater risk, they will move... perhaps reluctantly. It's not a trouble-free proposition for them. If it was, they would have done it already.
Next question:
"We don't perceive that there is a national bubble but it's hard not to see ... that there are a lot of local bubbles," he said.
The Fed's policy in sharply cutting U.S. interest rates from 2001 to 2004 to 46-year lows -- before initiating a round of rate rises in June last year that continues -- was criticized by some analysts as having sown the seeds for a potential nation-wide bubble as house prices soared.
Since last June, the Fed has lifted its trend-setting federal funds rate from 1 percent to a current 3 percent in search of a hard-to-define "neutral" rate that neither fosters inflation nor crimps expansion.
Greenspan dodged a question about where the neutral rate is, calling it an "amorphous" concept. "Essentially you get down to the point that we will not know it until we're actually there. Maybe we'll miss it -- it's conceivable."
I agree that there are a lot of local bubbles, but I wouldn't call the Peoria market a bubble. As for the "amorphous" neutral rate, that's not a question I'd want to answer if I were him. I don't think I would say that it's coneivable that we'll miss it though. Some things are better left unsaid. (It's not like we don't all have those thoughts in the middle of the night, right?)
UPDATE: Calculated Risk has more quotes via Bloomberg. Lest anyone think I'm being Pollyannaish about the housing situation (which I would call a bubble in many areas of the country), I remind you of this post. So when CR quotes Greenspan:
"... only those who have purchased very recently, purchased just before prices actually literally go down, are going to have problems."
and a commenter on that blog says:
Would very recently be before or after he recommended prospective buyers to use ARMs?
I have to nod in approval. The ARM comment by Greenspan was a mistake.
The Prudent Investor has more as well.
Posted by William Polley at May 20, 2005 2:45 PM
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