April 4, 2003

Public Issue #96:

CITS DEBT WATCH


"IMF Witnesses a U.S. Asset Bubble"

Commentary by Dr. W. Curtiss Priest, Director:

In our last issue we addressed "Greenspan Cautions on Housing."

***

We are reminded of what Emily Dickinson said:

The truth must dazzle gradually
Or every man be blind.

For about five years our analysis showed that, at times, at
least 2/3rd's of the growth in the GDP was due to debt-financed
consumer purchases, and, that the target of the debt collateral
was the homes of our country's homeowners.

And so the presence of an asset bubble has dazzled, many, only
gradually, despite the fact that it's manifestation occurred
a number of years ago.

I am sometimes stunned at how some otherwise very bright
people have simply dumped their money into the trough
of a bubble mania. Yet, this behavior of mankind in our
"modern economic system" has occurred time again. We,
repeat our recommendation that you consult Dr. Kindleberger's
1979 book, _Manias, Panics, and Crashes_ for anyone who doubts
this history of our country, and of other countries throughout
recent history.

So, does the "official" recognition of an "asset boom" by
the IMF make it so? Or will this, too, be ignored?

Sidebar: I sometimes speculate that the emergence of a
panic will be mitigated by the use of anti-anxiety drugs,
which were far less available to prior generations.

This does not mean we will drug a panic away, but, I
believe it will simply take on a more gradual form of
decline. While one colleague argued that with "electronic
trading and banking" -- a collapse could take place in
five minutes rather than over three days, I do picture
those feeling peaked will simply increase their drug
intake. (I must test this hypothesis by obtaining time-series
data on diazepam -- a.k.a. Valium, Xantac, and similar panic-
mitigating drugs.)

We present to the reader the "home page" for the IMF
"survey" "When Bubbles Burst."

We have pasted in the referenced URL's. You may, instead,
simply go to the first URL, and click through to parts of
the report and transcripts from an IMF videocast on the
report. (and please note that the transcripts are all in
one file, but the sections have been tagged via the link --
notice the use of '#' )

(Also, below, is a shorter, Associate Press summary on
the report as it appeared in the April 4th edition of
the Boston Globe.)

A text version of the introductory IMF page:

Source: http://www.imf.org/external/pubs/ft/weo/2003/01/index.htm

WORLD ECONOMIC AND FINANCIAL SURVEYS World Economic Outlook Growth and
Institutions April 2003

A Survey by the Staff of the International Monetary Fund

2003 International Monetary Fund

While the central focus of World Economic Outlook is a comprehensive
review of recent global developments, forecasts and risks, and current
policy recommendations, it also contains analytical chapters providing
an in-depth analysis of a variety of topical policy issues that help
underpin the policy advice. Starting with the April 2002 WEO, the IMF
has been making these analytical chapters available to the public
through the IMF's website about one week before the full WEO document
is formally released, to provide them with greater visibility. The
published version of the WEO will of course continue to contain all
chapters.

Contents

168k pdf file
Foreword
http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/front.pdf


Chapter II. 348k pdf file
When Bubbles Burst
http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/front.pdf


Real and Financial Effects of Bursting Asset Price Bubbles

Corporate Fragility and Investment: What's Different About the Recent
Bubble?

Appendix 2.1.Identifying Asset Price Booms and Busts

References See Also: Video Webcast: The Real and Financial Effects of
Bursting Asset Price Bubbles
http://www.imf.org/external/mmedia/view.asp?eventID=158
By Thomas Helbling and Marco Terrones Senior Economists, World Economic
Studies Division (first essay in Chapter II) Transcript
http://www.imf.org/external/pubs/ft/weo/2003/01/wc040303.htm#th

Video Webcast: Corporate Fragility and Investment: What's Different
About the Bubble? By Luis Catão (Senior Economist, World Economic
Studies
http://www.imf.org/external/mmedia/view.asp?eventID=159 Recent
Division (second essay in Chapter II) Transcript
http://www.imf.org/external/pubs/ft/weo/2003/01/wc040303.htm#lc

Chapter III. 352k pdf file
Growth and Institutions
http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/chapter3.pdf

Some Background Considerations

Empirical Analysis and Assessment

Institutional Reform in Practice

Appendix 3.1. Do Institutions Drive Economic Performance?

References See Also: Video Webcast: Growth and Institutions Prepared
by Maitland MacFarlan, Hali Edison, and Nicola Spatafora Deputy
Division Chief, Senior Economist, and Economist, respectively;
World Economic Studies
http://www.imf.org/external/mmedia/view.asp?eventID=160

Division ( Chapter III) Transcript
http://www.imf.org/external/pubs/ft/weo/2003/01/wc040303.htm#mm

Chapter IV. 272k pdf file Unemployment and Labor Market Institutions:
Why Reforms Pay Off
http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/chapter4.pdf
Why Do We Need Labor-Market Institutions? Is High Unemployment a
Structural Problem? What Is the Effect of Labor-Market Institutions on
Unemployment? What Are the Quantitative Benefits of Reforms? Appendix
4.1. An Empirical Model of Unemployment References See Also: Video
Webcast: Unemployment and Labor Market Institutions: Why Reforms Pay
off, by Xavier Debrun, Economist, World Economic Studies Division
(Chapter IV)
http://www.imf.org/external/mmedia/view.asp?eventID=161
Transcript
http://www.imf.org/external/pubs/ft/weo/2003/01/wc040303.htm#xd

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For interested readers, our prior issues of the DEBT WATCH
that document real estate-financed consumer debts can be
found here:

http://groups.google.com/groups?hl=en&lr=&ie=ISO-8859-1&scoring=d&q=%22cits+debt+
watch%22+%28%22real+estate%22+OR+%22debt-financed%22%29

[please rejoin, without spaces if this above line becomes split]

You can see in this Google (Groups) search, that we are searching
the CITS DEBT WATCH for either newletters that mention
"real estate" or those that mention the phrase "debt-financed."

Of 111 entries for the DEBT WATCH, 45 mention this topic.

The entries appear in reverse chronological order, with the
most recent, first.

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Previous issues of (all) the CITS DEBT WATCH:
http://groups.google.com/groups?q=cits+debt+watch&hl=en&scoring=d

The entries appear in reverse chronological order, with the
most recent, first.

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IMF suggests US housing market could go bust

Says drop often follows bubble

By Associated Press, 4/4/2003

WASHINGTON -- One more threat to the fragile economy -- the possibility
that America's booming housing market could be headed for a bust.

In a survey of global economic dangers, the International Monetary
Fund warned yesterday that the US housing market -- after two years of
record sales and strong increases in home prices -- could be headed
for a fall.

The study said that based on experience, a housing bubble in an
industrial country has a 40 percent chance of being followed by a
sharp drop in prices.

It did not explicitly forecast a US housing bust, but did raise
concerns about its possibility, especially because past housing
declines have been associated with periods of global economic
weakness, such as the US recessions in 1991 to 1992 and 1981 to 1982.

The IMF study contrasts Federal Reserve chairman Alan Greenspan's
belief, expressed in congressional testimony and speeches, that the US
housing industry is not headed for a sharp falloff in sales or prices.

The record level of sales of both new and existing homes the past two
years has been spurred by the Federal Reserve's campaign to push
interest rates to the lowest level in four decades.

The idea is to bolster a US economy hit by plunging stock prices, the
2001 recession, terrorist attacks on New York and Washington, and
corporate accounting scandals.

The IMF report, titled "When Bubbles Burst," examined the effect of
sharp declines in prices of both homes and stocks. The US economy is
still suffering from the fallout of a burst stock market bubble that
began in early 2000. Since that time, stock prices have fallen for
three straight years, something that hasn't occurred on Wall Street in
more than a half-century.

To qualify as a bust in the IMF study, the drop in stock prices had to
exceed 37 percent while the decline in house prices only had to exceed
14 percent. The average price drop in a stock market bust was 45
percent while the average housing price decline was 30 percent.

While the report found that housing busts occurred less frequently
than stock market slumps, housing declines tended to last longer and
were a bigger drag on the overall economy.

The IMF said stock market declines occurred on average every 13 years,
lasted for about 2 1/2 years and resulted in a 4 percent loss in total
economic output.

By contrast, a period of sharp declines in housing prices tended to
last nearly twice as long -- four years -- and resulted in a GDP loss
twice as large as the GDP losses caused by a drop in stock prices.

IMF officials stressed they were not saying the current 27 percent
rise in home prices was an asset price bubble that was bound to burst
-- but officials said economic policy makers should be aware of the
potential risks.

Greenspan has argued that when housing bubbles emerge in the United
States, they tend to be localized in particular parts of the country.
He said housing prices are also not as volatile as stock prices,
because it is easier to sell stock than homes.

"Any analogy to stock-market pricing behavior and bubbles is a rather
large stretch," Greenspan said in a recent speech.

This story ran on page D4 of the Boston Globe on 4/4/2003. c Copyright
2003 Globe Newspaper Company.

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posted by Las Vegas at 6:28 PM