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Since early 2009, the American stock market has more than doubled while the economy has crawled up by about 2 percent. Bad economic news is good market news. Sequester? Stocks zoomed right past it. Europe is in recession; its stocks have been soaring. Japan has suffered deflation for 15 years; stocks have been climbing recently. Greece is Europe’s worst economic basket case, but its stock market zoomed 33 percent last year.

What’s going on? The United States Federal Reserve, our central bank, has put interest rates at record low levels and says it will keep them there until unemployment improves. Other central banks in the world are taking similar steps. In short, they are all printing gobs of money. That money is not improving economies very much but is lifting stock markets. It sounds counterintuitive, but it really isn’t. Sad but true, Wall Street is thriving because Main Street is hurting, and other industrial countries have the same disease.

Economist A. Gary Shilling says investors “couldn’t care less” about the slow economy “as long as central banks are shoving liquidity out the door.”

Springfield, New Jersey–based economist A. Gary Shilling calls the phenomenon “the Great Disconnect — the vast gulf between the economies around the world that are growing anemically at best and investors who couldn’t care less as long as central banks are shoving liquidity out the door.”

But history tells us that central banks can’t print money indefinitely. Lots of things can happen, and inflation is just one of them. Now, economies are so weak that companies can’t raise prices, despite all that money floating around. Some members of the United States central bank warn that when money is so easy to come by, investors start doing stupid things, like pouring money into junk bonds or real estate speculation.

Easy money begets bubbles, and bubbles beget trouble. Financial bubbles have caused havoc since the late 1990s. The bubble in tech stocks (particularly dot-coms) was a precursor of the 2000–2002 downturn and bear market. Then, beginning in 2007, throughout 2008, and into early 2009, the bursting of the real estate bubble brought on an economic collapse from which we are barely recovering now.

Alan Greenspan infamously declared that economists can’t see bubbles until they burst.

What’s scary is that in both of those crashes, our Federal Reserve did nothing. In fact, Alan Greenspan, who was in charge during the buildup to the first collapse, declared that economists cannot detect a bubble until after it has burst. He argued that addressing stock-market distortions is not part of the Fed’s mandate. But he made a liar of himself by pumping out money in 1987 when stocks suddenly went down, upsetting Wall Street. When stocks went up irrationally in the late 1990s, he stood idly by — and ultimately, of course, they crashed. The Dow Jones Industrial Average dropped 49 percent and the Nasdaq, where most major San Diego stocks trade, plummeted 79 percent.

Ben Bernanke insisted that there was no housing bubble.

The Fed is now headed by Ben Bernanke. In 2002, he stated in a speech, “The Fed cannot reliably identify bubbles in asset prices.” Before the 2008 crash, he insisted that there was no real estate bubble. In November of 2005, economists Dean Baker and David Rosnick (in a paper called “Will a Bursting Bubble Trouble Bernanke?”) made a prescient prediction: the housing bubble was around the corner. Home sale prices were rising far more sharply than rents; home construction was ahead of itself; the savings rate was down.

Bernanke blew it completely, while Baker and Rosnick were correct. There was not only a bubble — there was a colossal bubble.

If only Greenspan had visited San Diego in the late 1990s and Bernanke had stopped by sometime before 2007–2008.

One of the big money machines of the 1990s tech bubble was the initial public offering, or a company issuing stock for the first time. If Greenspan had just seen some San Diego new issues: Wireless Facilities went public on November 5, 1999, at $15 a share; the first trade was at $37.50, and the stock closed the day at $62. Diversa went public on February 14, 2000, at $24; the first trade was at $54.50, and the closing price $75. Websense went public March 28, 2000, at $18; the first trade was $34.50, and the closing price the first day was $47.75. Onetime online-music wunderkind MP3.com went public July 21, 1999; the initial price was $28, and the first trade was $92.

Richard Russell knew the 1990s tech market was a market that would burst.

This is not how a rational market operates. It was strictly gambling. This is not investing, and it has nothing to do with the allocation of capital, which, after all, is supposed to be the purpose of Wall Street. And Alan Greenspan didn’t see a bubble? At the time, Richard Russell of La Jolla’s Dow Theory Letters declared the dot-com phenomenon to be one of the biggest bubbles in history.

Bernanke should have visited San Diego to learn what a housing bubble was all about. For example, researchers Baker and Rosnick stated in their 2005 warning report, “In the last eight years, [national] house sale prices have risen by 55 percent, after adjusting for inflation.” There was no precedent for this run-up because home prices normally rise with inflation, they said.

But San Diego made those national figures look piddly. Over the same eight years, the Zillow.com home-value index for San Diego soared from $153,900 to $525,100. Those home values continued rising until February of 2006, when they topped out at $534,500. Then the bubble burst, and they hit $352,100 in April of 2009. Now they are back at $381,900.

Greenspan actually hinted of a stock-market bubble in 1996, then backed down and fed it with more easy money until the crash. Now, many think Bernanke’s extremely easy money policy will create another housing or stock-market bubble. He doesn’t see it, and frankly, neither do I at this point, but some kind of unhappy result of this madcap money printing is inevitable. As Aldous Huxley once pointed out, “That men do not learn from the lessons of history is the most important of all the lessons of history.”

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Comments

Psycholizard March 13, 2013 @ 2:56 p.m.

My concern now is that the banks are now playing the market, and if stocks fall they may take the banks with them. That a bank can make an equity play in a company considered too risky presumably, for a direct loan, is symptom of the general insanity. In the wild days of 1929 banks loaned to stock players on margin, but didn't play themselves. The banks executed their margin calls promptly and profitably, and ended 1929 cashed up and ready to loan. The banks failed three years later. This time the banks and stocks will collapse together. I call it the bear hug. Of course, like the song about cocaine, "They say it will kill me but they don't say when.", I don't expect to persuade any thrill seekers wishing to ride the market.

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Don Bauder March 13, 2013 @ 7:21 p.m.

Psycholizard: Bernanke keeps saying that he keeps interest rates so low, printing so much money, because he wants to relieve unemployment. That may be one motivation, but a major motivation is to run the stock and bond markets up. He has said that healthy markets improve confidence. Balderdash. The richest 1% have half the financial assets in the country. The top 1% have 40% of the nation's wealth. Fed policy is boosting confidence of the very richest. The Federal Reserve is exacerbating one of our greatest problems -- the unequal distribution of wealth and income. Best, Don Bauder

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Frederick Simson March 13, 2013 @ 8:44 p.m.

I got burned by a real estate limited partnership, all the investing rage in the late '70s when I was a young sailor with a huge (to me) reenlistment bonus check burning a hole in my pocket. Thank God I only gambled away "extra" money and not day-to-day survival money like people did during the housing bubble. People have said that I have reacted too conservatively since then, but I maintain a comfortable (not lavish, but comfortable) lifestyle now. I have learned to like my house as it is and did not over-improve it as so many of my neighbors did, drowning in their underwater mortgages. Mine will be paid off in 5 years, a feat my parents accomplished earlier in their lives than me, one which once done eased their finances immeasurably. One thing I cannot do is retire like my Dad did in his mid 50's (I'm there now and still working). I do remember the crazy inflation of the '70s and fear a repeat of that history, or another Depression.

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Don Bauder March 14, 2013 @ 7:01 a.m.

Frederick Simson: There have been many scams in real estate limited partnerships. When the residential real estate bubble burst in the 2005-2006 years, a lot of people got wiped out. Federal Reserve and government officials who kept up the myth that housing prices don't fall deserve part of the blame for these people getting slaughtered. Your decision to have a conservative lifestyle is a wise one. Your decision to continue working is also wise. Inflation and depression are certainly possible -- they always are. Best, Don Bauder

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Fred Williams March 13, 2013 @ 11:12 p.m.

All these factors you've described are sufficient to set up the global economy for a great fall.

The question in my mind is what the trigger will be that starts the panic. Another terrorist attack? A cyber-attack that actually does damage to financial systems (they're so vulnerable to this it's almost a certainty it WILL happen, but who knows when)? Another war, perhaps with N. Korea, or Iran, or in Norther Africa or will the US openly intervene in Syria?

In the meantime, for normal folks without insider trading knowledge, the only possible outcome is negative.

This is squarely on Obama's shoulders. He has both the power and opportunity to challenge these corrupt banksters and chooses instead to coddle them (look at the HSBC slap on the wrist).

Unfortunately, I see this getting really ugly...civil unrest ugly. Militarized thug-cops beating old lady protesters ugly. Bombings and assassinations ugly.

Is there time to prevent this? Barely. But I have zero confidence that those with the power to enforce the laws will actually do so. Rather, they will unleash the thugs and start a civil war instead of challenging their paymasters.

San Diego is a microcosm representative of the rest of the country. A corrupt oligarchy has strangled the city, and the country. Until we get rid of them, there is no hope for anything getting better.

If the lawful means of getting rid of them won't work, then non-lawful means will be used. That's the lesson of history, if anyone is interested in learning from it.

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Don Bauder March 14, 2013 @ 7:11 a.m.

Fred: Your analyses are astute, your concerns valid. It is now coming out -- finally -- that government for years has consulted economists on whether or not to pursue criminal cases against big financial institutions. If some economist says that pursuing a criminal case against a big bank would unsettle the world economy, then the case may be dropped, or settled for a piddling amount. Holder admitted this in recent testimony and so did Mary Jo White. This is an admission that big banks are too big to fail and too big to jail. This is also a stark admission that there is a double standard in the justice system: one set of laws for average Joes, another for the rich and powerful. As you mention, the brutality used to crush the Occupy movement is an example of a police state enforcing the will of the plutocracy. But in the future, it might not be so easy. Yes, San Diego is a microcosm of the U.S. in this regard. The CPUC is an example of the same mentality: protect the utilities and screw the ratepayers. Best, Don Bauder

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Psycholizard March 14, 2013 @ 4:07 a.m.

I'm for the Fed printing money, and the government helping by running a deficit, but government insured banks shouldn't even accept stocks as collateral, let alone play the market themselves. The Fed is pumping money where there is inflation already. Government chartered banks should consider the public good, staking stock gamblers is bad for the country. And while we are dreaming, perhaps banks could finance industrial expansion here in the US. Incredible as it may seem, companies once borrowed from banks for purposes other than stock manipulation.

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Don Bauder March 14, 2013 @ 7:16 a.m.

Psycholizard: You are right. The purpose of Wall Street was once to finance the nation's industry. Now the purpose is to gamble, often with funds provided at almost no cost by the central bank. (Remember, the big investment banks are now commercial banks that can borrow from the Fed for almost zero%.) Best, Don Bauder

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nokomisjeff March 14, 2013 @ 9:31 a.m.

The purpose of Wall Street is to make money for the exchange members, the investment bankers, and the insiders. It's always been that way since the days of the old Buttonwood tree. Financing industry from Wall Street is still very big business with IPO's and limited partnerships, to rounds of financing. None of this has stopped. Volatility has gone up, and to some that makes it seem riskier, as it should be. There's no such thing as easy money, and if there is, then you are getting paid short odds.

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Don Bauder March 14, 2013 @ 2:16 p.m.

Jeff: How can you say there is no such thing as easy money when the Fed is providing short term money to financial institutions for 0 to 0.25%, and is buying long term paper to run long rates down to record low levels? If that's not easy money, then hookers and pickpockets don't have easy morals. Best, Don Bauder

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j6winter March 14, 2013 @ 8:33 p.m.

Don, how could a working person with a Schwab account make money from the coming bubble burst? I couldn't figure that out before the 2007 real estate bubble, even though I predicted the burst in 2006. It would be great if the common person could actually profit from this current situation. Thanks, Jerry PS I've been reading you since the SDUT days - you've always been right on the money. It's too bad that more San Diegans don't read/understand your columns before they vote.

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Don Bauder March 14, 2013 @ 9:11 p.m.

j6winter: I have been buying blue chip stocks with well-covered dividends. Almost all yield more than 4%. So I have loaded up with utilities, oils, pharmas, consumer necessities, pipelines, royalty trusts. I have gone from 10% stocks in the early 2000s to almost 40% now. Without question, I believe this massive money creation by the world's central banks will lead to a severe downturn -- if not another crash -- at some point. However, stocks could potentially do better than bonds and maybe even cash in the apocalypse. Today, cash and bonds are essentially dead money, although I still buy some bonds occasionally. I think even those with moderate income should buy some of these stocks yielding more than 4%. Best, Don Bauder

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Twister March 16, 2013 @ 2:07 p.m.

Re: Don Bauder March 14, 2013 @ 2:16 p.m.

"Jeff: How can you say there is no such thing as easy money when the Fed is providing short term money to financial institutions for 0 to 0.25%, and is buying long term paper to run long rates down to record low levels? If that's not easy money, then hookers and pickpockets don't have easy morals. Best, Don Bauder"

Taxpayers pay the interest on the debt, not the banks. That means that we are paying the banks to take our money. Pretty slick trick! How do I become such a leech? Welfare? That will be the first to go at the first prick.

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Don Bauder March 16, 2013 @ 7:05 p.m.

Twister: This is money that the Fed creates out of thin air. But we are indeed paying the banks to take money, because inflation is higher than the interest rates they are charged. Best, Don Bauder

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