The greater fools: Greenspan and Bernanke

Closeup of dollar bill

According to the Greater Fool Theory, you can profit by buying an overvalued asset because there’s always someone (the greater fool) willing to pay you a higher price for it.

Here’s my corollary: The bigger the financial bubble (including the subsequent crash) the more confident regulators are that it’s containable.

To illustrate, I offer the words of Alan Greenspan and Ben Bernanke leading up to the 2008 meltdown, as reported by the Financial Crisis Inquiry Commission and others.

"Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications." -- Greenspan in 2005, regarding the "apparent froth" in housing and mortgage markets, and the moderating influence of "nationwide banking and widespread securitization."

"Although speculative activity (in housing) has increased in some areas, at a national level…price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas." -- Bernanke in 2005, on the economic outlook.

"Instead of trying to contain a putative bubble by drastic actions with largely unpredictable consequences, we chose…to focus on policies 'to mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion.'" -- Greenspan in 2004, on monetary policy.

"The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." -- Bernanke in early 2007, on the economic outlook.

"The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost." -- Bernanke in 2002, on deflation.

Well, the housing and credit bubbles have been followed by a gigantic money bubble, thanks to the printing press, spawning satellite bubbles in bonds, equities and commodities, and threatening the most destructive bubble of all -- hyper-inflation.

But the Fed chief confidently asserts that he has a "toolbox" at hand to deal with these problems. We'll see what he says during his first-ever press conference later today.

My corollary tells me we’re in real trouble.

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