With the bust in 2001, the US economy was dealt a heavy blow that struck its core.
Upon this, the US economy has become weaker than before.
Despite this, under the Greenspan reign, a new housing bubble is created to solve the ramifications of the dot-com bubble.
This lays the ground for more serious trouble and shows the making of a brand new economic storm.
Let us now explore how housing will be a new bubble to come after the dot-com fiasco.
Having kept interest rates excessively low for too long, there was a huge rise in demand for mortgages.
Also, people began to take larger mortgages and started drawing home equity to increase consumption.
As a result, there was a recovery because people now had more money to spend.
This led to rising house prices (also because of increased wealth from successful stock investing in the 1990s )and mortgage debt.
While the recovery was good and vital to bring the US economy back to its feet, it is important to note that Greenspan once again neglected the possibility of bubbles despite enduring through a stock bubble.
Here, he even assured that bubbles can't develop in housing markets.
However, when he said that home prices couldn't fall in the early 1990s, they still fell.
In addition, he also claimed that turnover of houses is less than 10% compared to stocks at 100% annually because demand for living space is revised gradually.
Nevertheless, despite this 'fact', stock and real estate bubbles still burst in Japan during 1989.
Here, instead of learning from Japan, he insisted in his erroneous views and failed to know that market imbalances ought to be corrected earlier.
Because of this, the housing bubble in US started growing and this encouraged the build-up of other market imbalances like excessive borrowing and investment, digging the economy a bigger hole to fall into.
While the housing bubble indeed solved the 2001 recession, it is a problem of far greater magnitude because people have more wealth tied in their houses compared to stocks.
Here, despite repeated warnings by district Federal Reserve President Michael Moskow, Alan Greenspan still failed to see the housing bubble and such ignorance in the alleged creme de la creme of US will eventually lead the economy to doom.
To make things worse, Ben Bernanke even proposed to fight deflation then when inflation was rather high.
Deflation means that the value of money is increasing against a basket of specified goods and services.
Here, with understated inflation and efforts to increase it, the government is attempting to cheat its people via inflation.
Instead of worrying about deflation then, Greenspan should have worked on curbing the growth of this real estate bubble.
Now, being inept in spotting the right bubbles and injecting new inflation into the economy, the bubble becomes permitted once again to fester and grow.
Here, I find Benjamin Franklin's quote apt for the situation.
He said that if you think education is expensive, try ignorance.
Having experienced 1 round of economic distress, it is really saddening to see the US plunge into another because of the incompetence of a purportedly brilliant man.
In conclusion, having covered how Alan Greenspan was brewing stronger poison to kill the dot-com poison, I believe readers now know why the economy is plagued by so many diseases.
Having known all these, it is definitely essential that we prepare ourselves for bad times always!