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Senior Proutist Dr. Ravi Batra in Dallas Morning News

Blaming it on Greenspan

Batra says ex-Fed chief created housing bubble, trade deficit

12:00 AM CDT on Wednesday, April 19, 2006

By DANIELLE DiMARTINO / The Dallas Morning News

Ravi Batra is not one to mince words. Take the title of the latest of the 15 books he’s written in his 33-year career as an economist: Greenspan’s Fraud.

[Click image for a larger version] REX C. CURRY/Special Contributor
REX C. CURRY/Special Contributor
Ravi Batra, economics professor at Southern Methodist University, says the housing bubble threatens the economy.

Blaming it on Greenspan

Batra says ex-Fed chief created housing bubble, trade deficit

12:00 AM CDT on Wednesday, April 19, 2006

By DANIELLE DiMARTINO / The Dallas Morning News

Ravi Batra is not one to mince words. Take the title of the latest of the 15 books he’s written in his 33-year career as an economist: Greenspan’s Fraud.

[Click image for a larger version] REX C. CURRY/Special Contributor
REX C. CURRY/Special Contributor
Ravi Batra, economics professor at Southern Methodist University, says the housing bubble threatens the economy.

Though the book was greeted with skepticism, it has gained greater acceptance as many of the possibilities it raises tiptoe closer to reality.

A professor at Southern Methodist University and a regular on CNBC, Mr. Batra busily debates whether there’s enough time to make the changes needed to avoid a painful fallout from years of too-low interest rates.

At risk, he says, is the very stability of the U.S. economy. At issue are what he calls the twin bubbles of oil and housing and the resultant runaway trade deficit.

Though there is a tendency to dismiss his warnings, many of Mr. Batra’s predictions have come to pass. In 1990, the Italian prime minister awarded him the Medal of the Italian Senate for predicting the downfall of Soviet communism 15 years before it came to pass.

Another of his books, written in 1980, said the downfall of capitalism would be spurred by Islamic fundamentalism starting in 2000.

In an interview with The Dallas Morning News, Mr. Batra discussed the current state of the economy, Alan Greenspan’s legacy and the challenges facing the current Federal Reserve chairman, Ben Bernanke.Let’s start with the title of your latest book.

The book focused not just on monetary policy, but also on many other areas over which Alan Greenspan had influence, such as Social Security. The idea of creating a trust fund for the baby boomers with guaranteed benefits came about in 1981 with his active support. But Greenspan knew in advance there would be no cash to fund those accounts. By April 1983, he was saying we needed to balance the budget by cutting Social Security benefits.

In totally contradicting himself, he deceived the public into paying higher payroll taxes. People don’t blame him, but that’s where the idea came from.

How else has he affected future generations?

Greenspan created a huge trade deficit. Here again, though, people don’t blame him. They just think it’s globalization.

For most economies, free trade refers to goods, but for Greenspan it meant the free trade of capital. He pushed for the deregulation of the free flow of capital across countries, but the result was that the U.S. dollar would not fall anymore in response to trade deficits. In the past, the dollar would quickly eliminate trade deficits.

So far, it would appear that the trade deficit, while at record levels, does not pose a threat to the U.S. economy. Is there a tipping point at which the deficit will matter?

The tipping point will be the bursting of the housing bubble. Much of the housing bubble has been financed by foreign purchases of mortgage-backed securities. The problem is, many of these loans have been backed by a fraud of their own – unqualified buyers have been given loans by the mortgage industry because the lenders then pass along the risk into the mortgage-backed securities market.

Can we be sure it is a housing bubble? Many in the real estate industry are predicting a classic soft landing.

Bubble cycles can last seven to eight years, with the unraveling typically beginning in the fifth year. The housing bubble started in 2001 when Greenspan panicked and started slashing interest rates at a fast pace. Five years from then is 2006, and what are we seeing today? A slowdown, which is starting right on schedule.

Next year, we’ll have bigger problems as house prices fall, especially in the hot markets. Finally, in 2008, the real housing crunch will come, with price declines in much of the nation.

The worst implication is that foreign investors in mortgage-backed securities will be spooked for fear they’ll lose their principal. It’s one of my biggest fears.

Of course, if we know this now, there is obviously time to do something about it. That brings Ben Bernanke into the picture.

Remember, his biggest challenge is the trade deficit, which is directly tied to the housing bubble. But right now, Bernanke is worried about inflation, which is coming from high oil prices. What he needs to do something about is the price of oil.

How is that possible? What about all this demand we hear about coming from China and India?

That’s a myth. Yes, demand is rising, but so is supply; inventories are at multiyear highs. That wasn’t the case in the 1970s, when there was a physical shortage of oil; you could see supply and demand raising the price of oil. Do you see any lines at gas stations today?

The real problem is the extreme concentration in the oil industry; I call them the five bullies. All Bernanke needs to do is mention the concentration and that they should be broken up, and you would see the price of oil fall sharply. Oil is in a bubble of its own.

So if oil prices fall, inflation will no longer be a threat and interest rates can come down?

Yes, but Bernanke is a Greenspan clone when it comes to dealing with the markets, so inflation will keep rising, as will the core rate of inflation, so he will keep raising interest rates.

So what’s the solution? Is there a way out?

There is, and it’s consistent with free trade. I would propose a dual exchange rate system like those in Japan and China. If we could fix our export exchange rate, our exports would rise sharply as the prices of our goods fell overseas. We would let all international transactions continue to occur at the free-market dollar rate.

It is a system that would have to be managed by the Fed. China, for one, would be happy, as it would take pressure off them to revalue their currency and avoid the prices of their goods rising in America. Meanwhile, the prices of American goods in China would fall dramatically. This would not only rebuild our manufacturing base, it would reduce the trade deficit sharply.

We have to bear in mind that every empire, from the Romans to the British, has fallen because of a huge trade deficit.

E-mail ddimartino@dallasnews.com

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