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May 26, 2005


Dave Iverson

Morgan Stanley's Berner and Marschoun believe that the US Housing Bubble will rust, not bust.

United States: Housing Bubble Metrics, Richard Berner and Michael Marschoun, Morgan Stanley Global Economic Forum, May 27, 2005


... The outcome of the housing bubble debate is important for financial markets in at least two respects. First, while many suspect that frothy housing markets will stay the Fed’s hand for fear of popping a bubble that would undermine economic growth, we believe that the housing situation will encourage officials to be transparent about their goals and keep tightening monetary policy at a gradual pace. Fixed income markets that increasingly are romancing a pause or an end to Fed tightening will have to reckon with that reality.

Second, we believe that housing and other consumer lenders are more at risk to deflating or just rusting home prices than are consumers themselves. For the consumer, a source of wealth will fade, which will promote slower growth in spending and increased saving. And such consumers will be more vulnerable to other shocks. But the lenders, some of whom have mispriced the options embedded in the loans they ‘sold’ to consumers, will likely lose both income and possibly principal.

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  • Chronicles of international finance and geopolitics, with hints from thither and yon to help us find a way from "growth and development" to "sustainability."

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