This veritable army of technicians has been projecting increasingly higher earnings growth, on average, since early 1995. There appears little reason to doubt that analysts’ continuous upward revisions reflect what companies are reporting to

 

them about improved cost control, which, on a consolidated basis for the economy overall, adds up to accelerating labor productivity."Little reason to doubt", except for the fact that we now know that most of the frenzied histrionics to buy the bubble stocks were lies, generated by analysts who knew their brokerage houses’ bottom lines grew fatter when gullible investors believed their nonsense and bought into the bubble. The most notorious of these was famed Merrill Lynch senior Internet analyst Henry Blodgett, who, in a 2003 complaint filed by the US Securities and Exchange Commission, was alleged to have, while publicly remaining bullish on the stock, privately described Internet bubble cavalier 24/7 Media as a "pos", generally accepted as an American slang acronym for "piece of (obscenity for excrement)."

So, by the turn of the millennium, with Greenspan also flooding the markets with cash liquidity to deal with the hallucinatory threat of financial disruption due to computers malfunctioning with the turn of the century, aka the Y2K scare, nothing was there to stop stocks from reaching the full extent of their "irrationally exuberant" highs early in 2000, and nothing was there to protect those who had rode along with the bubble from devastating losses when it exploded soon afterward.

Many uninformed observers, such as the vast majority of the US media, believe that the terror attacks of September 11, 2001, led to the recession of the early part of this decade. This is demonstrably false; by 2000 the US economy was already slowing; it would formally enter recession early in 2001.

Just in 2000, Fleckenstein reports, $2.5 trillion of market capitalization was lost in the markets, and the worst was yet to come. The stock markets, which topped out early in 2000, were already substantially down by 9/11; the Dow Jones Industrial Average was down 19% from its highs when trading opened on 9/11; the NASDAQ was already down 66%. When the markets finally bottomed in October 2002, the Dow would be down just under 40%, the NASDAQ 78%, from the highs. Fleckenstein recounts a heart rendering personal narrative from a 60-year-old couple, who, following the crowd, lost everything and more buying Internet stocks on margin. Even though investments with this much risk were probably inappropriate for this couple, you’d have to be very hard-hearted not to be moved by their plight.

It is here that Fleckenstein makes one of his boldest contentions. Seeing the economy weaken beyond his control, with the Fed lowering interest rates 11 times in 2001 alone, Greenspan looked around to inflate a new bubble to replace the one that just burst. That, of course, was housing.

Greenspan saw the new liquidity generated by his interest rate cuts going not to corporate investment or back into stocks ( not until late 2003, at least) but into the housing market, and that was just fine with him. In April 2002 testimony before the Joint Economic Committee of the US Congress, Greenspan pulled from his sleeve his new ace-US housing.

Attractive mortgage rates have bolstered the sales of existing homes and the extraction of capital gains embedded in home equity that those sales engender. Low rates have also encouraged households to take on larger mortgages when refinancing their homes. Drawing on home equity in this manner is a significant source of funding for consumption and home modernization…

The ongoing strength in the housing market has raised concerns about the possible emergence of a bubble in home prices. However, the analogy often made to the building and bursting of a stock price bubble is imperfect ... Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole.

Information processing technology has enabled creditors to achieve significant efficiencies in collecting and assimilating the data necessary to evaluate risk and make corresponding decisions about credit pricing. With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. The widespread adoption of these models has reduced the costs of evaluating the creditworthiness of borrowers, and in competitive markets cost reductions tend to be passed through to borrowers.

Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10% of the number of all mortgages outstanding, up from just 1 or 2% in the early 1990s.

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