Sunday, November 27, 2005

Speculators 'Could Be Flipping Burgers'

A story from Associated Press Business Writer Ellen Simon, linked here via Business Week looks at the power of the Federal Reserve, and mentions the "ballooning housing market" in the lead.

Although the story barely skims the surface of issues of concern to those who watch the housing market, it does get right to the potential pain that's likely to be felt by speculators.

Quincy Krosby, chief investment strategist at The Hartford, says the fed doesn't care about how its actions could hurt speculators because the fed is focused on helping John and Mary Homeowner, the average Americans. Indeed, speculators know the risks, and if they don't, they never should have waded into the pool.

The smart flippers have likely moved on to safer places, or have gotten out of the market altogether. Those who stay in the deep end despite the dangers signaled by the darkening horizon are likely to lose, and when that happens, those shirtless speculators aren't going to get much sympathy.

Few people will step up and criticize flippers for contributing to the speedy escalation of home prices. Speculators shouldn't be criticized, unless, of course, they misused the tax system and claimed their investments were owner-occupied houses, when they weren't. Those who played by the rules, who took the risks and reaped the benefits deserve what they got. Fair enough. But, by the same token, there's not going to be much sympathy for those speculators who take the risks and fail.

Here's an excerpt from Associated Press:
The mighty Federal Reserve. It's more powerful than a ballooning housing market, able to stop inflation in a single bound. And, if it slips, if it uses its super powers unwisely, if it goes too far, it could push the economy into recession with just a nudge of its pinkie.

That's one way of looking at the nation's central bank. Under outgoing Federal Reserve chairman Alan Greenspan, it has become the main way. The Fed is seen as the arbiter of all things economic, the capital of Moneyland, with Greenspan as its ruler and resident hard-to-understand genius.

With the chairman's seat at the central bank expected to turn over to Ben Bernanke in January, it's time for a reality check. Just how powerful is the Fed?

While investors are growing impatient with the Fed's rate hikes, it's important to remember that at the start of this tightening program, rates were at a 45-year low. "It was like war time," Krosby said (Quincy Krosby, chief investment strategist at The Hartford, the Connecticut-based insurance company).

What the Fed is trying to do is take the air out of the housing bubble, slow down the larger economy and see employment edge slightly lower.

"The key is a slowdown, not a crash," she said. Still, when the Fed has finished, people will get hurt, she said.

Speculators could be in particular trouble. "The more leveraged you are, the more vulnerable you are to losing," she said. "Instead of flipping condos, you could be flipping burgers -- and I don't think the Fed cares. What the Fed cares about is the average American."
Find the entire story at this link.

— The Boy in the Big Housing Bubble