By Dave Anderson:
The Federal Reserve was at the very least developping an inkling that the housing bubble was real and unsustainable because the American consumers who were fueling the bubble were tapped out. Their only source of expansion was through cheaper credit and digging into savings during a "boom."
From the May 2004 FOMC transcripts (p. 40)
House-price appreciation has been strong, and it appears to have been fueled not only by low interest rates but also by a more sustainable upward shift in the demand for housing. Moreover, roughly 80 percent of outstanding mortgages are at fixed rates, and most ARMs are hybrids with some rate protection. But other types of consumer lending tend to be at more-variable rates than mortgages, suggesting that households may be fully extended and somewhat more vulnerable to rate increases. This potentially negative effect will be muted so long as labor market conditions continue to improve.
When we last met I said that the missing piece was employment growth but that, given the pace of GDP growth, I expected to see employment begin to pick up modestly
The labor market never truly boomed in terms of wages and incomes derived from work. The American consumer was tapped out by conventional metrics in mid-2004 but the bubble was to be blown by unconventional means instead. The Fed had an inkling that the party was getting too boisterous given the fundamentals, and then they brought in a couple of extra kegs of "This time it is different" in terms of changes to long term housing demand.
Greenspan had one goal in mind - continue the illusion of a recovery so Bush would be reelected in 2004.
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