For the past decade, everything looked rosy in the US housing industry; interest rates were low and funding was easy to get. Banks offered mortgages with attractive initial interest rates, and assessed borrowers' abilility to service loans using formulae based on the initial discounted rates instead of the future long term rates, ignoring the risk that when rates rise the borrowers may be financially strained. With generous availability of finance, even people with weak credit histories and modest incomes became qualified to take out mortgages, though at higher rates (called the sub-prime mortgages - which was where the crisis started from). As more people could afford to buy houses, general prices rose, so that if anyone did turn out to be unable to maintain payment, he could simply sell the house and pay back the mortgage, and still made a profit (which he could use to buy another house). The various parts of the chain reinforce each other, thus making it easy to produce a bubble (or to put it another way, an elaborately linked system like this is unstable because any weakening of one link could spread to the whole system)

This happy chain is of course maintained only if interest rates stayed low. For much of the Greenspan era, rates were low, for some period very low. Let us trace back the events that caused this.

After Black Monday the Fed calmed the market by making it clear that a liquidity squeeze was to be avoided at all cost, and the crash was contained. Economic growth was, however, anemic for the remaining Reagan year and throughout the reign of George Bush Senior, though USA avoided the sudden economic collapse that took hold in Asia in 1997, a crisis infecting even the previously invincible Japanese economy (from which it has not quite recovered even now).

It was in Bill Clinton's second term that the boom began to take hold. This was also the period when dotcom companies began to show an impact. Venture capital funds pumped huge sums of money into all sorts of dotcoms, however dubious their business plans. While Greenspan made occasional mild remarks about "irrational exuberance", interest rates were slow to be raised. Partly, there was fear of prematurely choking off the late-coming economic boom and exciting new technology developments, and partly there was the Millenium Bug paranoia on everyone's mind. The prevailing nervousness about the possibility of something nasty occuring after the last day of 1999 made it hard to add to it by quick rises of interest rates, even though the NASDAQ index was appreciating incredibly. Almost as soon as interest rates finally began to rise in early 2000, dotcoms crashed. We can only speculate that if funds were not so easily available in the previous few years, the bubble would not have grown as large and the bursting would have been less painful.

Though the pain level in Silicon Valley was high in 2000, by 2001 people were beginning to agree that a weeding out of all those unrealistic ventures was not such a bad thing, and life would soon be bright again. However, in September the World Trade Center received its terrorist attack and chaos reigned in New York City and in the air transport system. All the major airlines were on the verge of bankrupcy. Again, a year later things were getting back to normal, but the collapse of Enron struck a new blow, and a few months later a weird, highly infectious and deadly version of the common cold spread from China to Hongkong to Canada and Singapore, once again throwing things into chaos after the region had just begun to recover from 1997 and later blows.

In short, for nearly 15 years of his chairmanship, Greenspan faced one crisis after another, each deterring the desire to tighten monetory policies that might have existed. In any case, the desire was not a strong one, the reason being that consumer price index was rising very slowly, because America began to import huge amounts of consumer goods from China at dirt cheap prices, with Walmart's growth to be the world's largest company tied at least partly to this.

It was, however, misleading to say that inflation was low throughout the period, because house prices were rising rapidly in the last few years. Adding to the rise in share prices, there was clearly asset inflation present.

We see that, a unique set of events caused a prolonged period of easy money supply, pumping the whole world full of liquidity, some circulating rapidly within the US system itself, others following various paths around the world, including in particular China. For a while at least, everyone seems to be benefitting, and old fashioned reservations and cautions seem to be inapplicable in this brave new world. However, the old world is about to reassert itself.

Like Greenspan, Bernanke initially had a hard time establishing a smooth commucation mode with the financial and journalistic world, and a few simple words about "determination to control inflation" at dinner with a reporter panicked the market the next day. Bitten once, he was many times shy. As the housing crisis loomed, he continued to make soothing remarks about things not getting much worse and not for very long, while "firm about controlling inflation" was repeated but regarded as mere officialese. But these bandaids are beginning to look irrelevant, and while financial system sputters get louder, Bernanke adjusted his level of upbeatness downward though always a little higher than the situation warranted.

Singapore has had its share of bubbles. Chartered Semiconductors, for example, once traded at nearly $30 a share, while the mid 90s property bubble was wide reaching, spreading from the central area to both east coast and bukit timah/hillview, even bishan HDB units, though the price increases did not reach the level of the recent orchard/sentosa condos. When prices tumbled, after 1995's government tax measures to cool down the market, followed by the 1997 regional crisis and later events, a large number of people were put into negative asset situations. Those who also lost their jobs and could not keep up loan repayments got into dire straits, since many couple required the CPF contributions and additional cash contributions from both spouses to meet the mortgage repayments, so that the loss of one job had serious consequences. Those who held onto their jobs were in a state of paralysis.

These lessons are still fresh in people's minds, and it only takes a few small raps on the knuckle from the government signalling its concern to start a significant cooling off. The psychology has to turn. We already heard news that the government has raised charges for increasing the usage of residential land, causing listed property counters to tumble that day (though settling down next day) and I believe this is only the start of a set of measures to cool down the property market, both to prevent rents and other business costs going too high thus deterring investors, and to stop the formation of too big a bubble whose bursting could start a recession.

Some carryover effect from the coming US recession is inevitable, but China could provide a compensating factor as it increases domestic consumption and exports tourists and students.

please see guestcolumn for other investment opinions

added on 13 Dec 2007: Bernanke has lost the street's confidence; you may or may not take critics like this one seriously

just one negative opinion, but the market's reaction to the interest rate cut on Tuesday and to the "add liquidity initiative" on Wednesday are revealing. Where did he go wrong?

I dont think the Fed acted in any obviously incorrect way; it was correct to raise rates during the last few years, and correct to keep still then start cutting this year, though you can debate whether they should have cut earlier and faster. Americans, individuals and corporations, made a mess of their finance, and want to blame someone, but I think Bernanke dd make the mistake of not being more forthcoming in warning of economic problems ahead. Looking back, it was nonsense to say that the economy was in generally good shape, the housing crisis would not impact the rest of the economy, etc. If I knew the situation was bad, no reason he and his colleagues would not.

Understandably, Bernanke was reluctant to get the blame for causing market crashes and for talking USA into a recession. But then, he and his committee, with their qualifications and expertise, and government appointed authority, are supposed to make difficult decisions. Since cutting interest rates causes the market to rise (till Tuesday), accompanying each cut by a suitably worded warning would have been the right approach.

the action of the Fed in accepting mortgage backed bonds as collateral for loans to banks, including investment banks (which are not part of the clearing system that the reserve system was originally intended to coordinate), has fundamentally changed the market recession fighting game - it has since August 2007 tried various schemes to enable liquidity of the banking system, with limited success, the main problem being that a very substantial portion of the assets of the banks and investment funds is in financial papers that contain some amount of mortgage asset, which has been devalued because of the real estate downturn, but with no reliable formula to measure the amount of devaluation; previously, value was simply determined by the market, but the market all but dried out because of the uncertainty, producing a cyclic situation: no market because nobody could value the papers, and no value decision because there is no market; the Fed's move, while itself only involves a modest amount of money, serves to break this cycle by providing a means for the papers to be used to raise money, and allow other papers to be valued relative to the papers deposited with the Fed

I now feel more confident in my expectation that the markets recover in the second half of 2008

JP Morgan, with the backing of Federal Reserve, has taken over Bear Stearn at just $2 a share, which traded last week at $50, before a sudden panic caused billions of client funds to be withdrawn, wiping out its ability to pay debts, salary, etc

this will undoubtedly set back the market recovery; by how much? it depends on whether similar panics occur with others, which in turn depends on how confident people are with the current Fed moves to rescue the market