New Clarity from an Old Obfuscator (Almost)
Keith Hazelton
April 02, 2007
After nearly two decades of perfecting the art of language obfuscation, former Federal Reserve Chairman Alan Greenspan, with his usual sparks of sanguinity and elan, suddenly is speaking very clearly.
In comments to conference attendees in Hong Kong in late February, Greenspan boldly suggested economies are "cyclical" and that all things considered, given the duration of the current U.S. expansion, we could be seeing early signs “we are in the later stages of a cycle.”
Which translates to a one-in-three chance of recession by year's end or early 2008 according to the Maestro of money, forgoing his usual indecipherable blather.
World financial markets, unfamiliar with such clarity, responded by swooning, the Dow Jones Industrial Average shedding more than 450 points intra-day, proving the old obfuscator still strikes fear into the minds of traders everywhere.
Also clear, mostly, were the 81-year-old former Fed chief's remarks at the Futures Industry Association meeting in Boca Raton on March 15th, addressing the likelihood of negative economic consequences as a result of developing subprime mortgage lending fallout.
Much of the strength in consumer spending over the past five years can be traced to capital gains on surging housing prices, whether realized or not, according to Greespan (emphasis mine).
If home prices (nationally) drop in a year, that could cause problems “to spill over into other areas (of the economy),” Greenspan noted, since consumer spending fuels two-thirds of the nation's economic activity, adding, “At the moment, we're not seeing this.”
But, slipping into characteristic ambiguity, he suggested if home prices “would go up 10 percent, the subprime mortgage problem would disappear.”
Huh?! Presumably the brewing subprime problem would “go away” in the sense that unqualified borrowers faced with dramatically escalating monthly payments resulting from interest-rate resets would be able to sell their price-inflated homes to other, more creditworthy buyers, should those buyers exist, and thus avoid late payments or default. Mr. Greenspan did not elaborate, nor did he offer suggestions for new living arrangements for subprime borrowers forced to sell their homes, in some cases after only a few months of “ownership.”
Interestingly, Mr. Greenspan of all people, economist he is, would know housing prices (like stock prices) cannot continue rising at a rate more than double the rate incomes increase, or at least not very long. We may be at that point where the "not very long" is now.
More ominously, Greenspan, again without benefit of verbal camouflage, accurately observed the strength of the U.S. economy has resulted from busy consumers who have benefited from capital gains on surging housing prices, whether realized or not.
"Realized or not" is the important part: Homeowner “A”, let's say, sold an 1,100 square foot Southern California fixer-upper in 2003 for $700,000, clearing, let's say, $600,000 on the sale and moved to Albuquerque and bought a 2,200 square foot home for $300,000, still presumably have $300,000 left over to save, invest or spend to prop the consumer economy. That $300,000 is a realized gain.
Homeowner “B”, who bought “A's” house in 2003 for $700,000, took out a $200,000 home equity loan in 2005 based on an appreciated appraised value of $900,000, and used the borrowed $200,000 to update and redecorate it, send junior to college and buy a boat and a motor home, based all those expenditures on $200,000 of unrealized gains, which now likely never will become realized gains because the neighbor across the street with a nearly identical house can't sell it a $600,000. The unrealized gain evaporated, but the $200,000 of additional debt remains.
Does any part of this scenario sound like late 1999-early 2000, when market indices stood at record highs and unrealized stock market gains had made everyone wealthy, at least on paper. How quickly those unrealized market gains disappeared, leaving, in many cases, only the margin debt or loans owed to brokerage firms and banks which had extended credit based on those lofty equity values.
The downside, of course, to which Mr. Greenspan alluded, is that subprime woes do, in fact, spill over to other areas of the economy in a great unwinding of the debt-driven consumer culture of the last two decades, becoming a vicious circle of collapsing housing prices, home sales and foreclosures, layoffs and bankruptcies.
Greenspan also repeated a warning about the massive strain on the U.S. budget and the economy in the future from the looming retirement of nearly 80 million baby boomers, who will draw benefits from Social Security and Medicare.
He called the pending retirements "one of the seminal events in the first part of the 21st century in the United States." (Seminal: containing or contributing the seeds of later development - Webster's)
Greenspan said as medical technologies advance, costs for services and medicine also will change.
"There is a significant probability that under existing law, that we have overpromised what will be available to Medicare recipients," he said (emphasis mine).
Overpromised is the operative word and perhaps the understatement of the coming century.
(See my companion piece on this site: "Social Insecurity and the Coming Intergenerational Battle Over Entitlements" dated March 23, 2007)
In comments to conference attendees in Hong Kong in late February, Greenspan boldly suggested economies are "cyclical" and that all things considered, given the duration of the current U.S. expansion, we could be seeing early signs “we are in the later stages of a cycle.”
Which translates to a one-in-three chance of recession by year's end or early 2008 according to the Maestro of money, forgoing his usual indecipherable blather.
World financial markets, unfamiliar with such clarity, responded by swooning, the Dow Jones Industrial Average shedding more than 450 points intra-day, proving the old obfuscator still strikes fear into the minds of traders everywhere.
Also clear, mostly, were the 81-year-old former Fed chief's remarks at the Futures Industry Association meeting in Boca Raton on March 15th, addressing the likelihood of negative economic consequences as a result of developing subprime mortgage lending fallout.
Much of the strength in consumer spending over the past five years can be traced to capital gains on surging housing prices, whether realized or not, according to Greespan (emphasis mine).
If home prices (nationally) drop in a year, that could cause problems “to spill over into other areas (of the economy),” Greenspan noted, since consumer spending fuels two-thirds of the nation's economic activity, adding, “At the moment, we're not seeing this.”
But, slipping into characteristic ambiguity, he suggested if home prices “would go up 10 percent, the subprime mortgage problem would disappear.”
Huh?! Presumably the brewing subprime problem would “go away” in the sense that unqualified borrowers faced with dramatically escalating monthly payments resulting from interest-rate resets would be able to sell their price-inflated homes to other, more creditworthy buyers, should those buyers exist, and thus avoid late payments or default. Mr. Greenspan did not elaborate, nor did he offer suggestions for new living arrangements for subprime borrowers forced to sell their homes, in some cases after only a few months of “ownership.”
Interestingly, Mr. Greenspan of all people, economist he is, would know housing prices (like stock prices) cannot continue rising at a rate more than double the rate incomes increase, or at least not very long. We may be at that point where the "not very long" is now.
More ominously, Greenspan, again without benefit of verbal camouflage, accurately observed the strength of the U.S. economy has resulted from busy consumers who have benefited from capital gains on surging housing prices, whether realized or not.
"Realized or not" is the important part: Homeowner “A”, let's say, sold an 1,100 square foot Southern California fixer-upper in 2003 for $700,000, clearing, let's say, $600,000 on the sale and moved to Albuquerque and bought a 2,200 square foot home for $300,000, still presumably have $300,000 left over to save, invest or spend to prop the consumer economy. That $300,000 is a realized gain.
Homeowner “B”, who bought “A's” house in 2003 for $700,000, took out a $200,000 home equity loan in 2005 based on an appreciated appraised value of $900,000, and used the borrowed $200,000 to update and redecorate it, send junior to college and buy a boat and a motor home, based all those expenditures on $200,000 of unrealized gains, which now likely never will become realized gains because the neighbor across the street with a nearly identical house can't sell it a $600,000. The unrealized gain evaporated, but the $200,000 of additional debt remains.
Does any part of this scenario sound like late 1999-early 2000, when market indices stood at record highs and unrealized stock market gains had made everyone wealthy, at least on paper. How quickly those unrealized market gains disappeared, leaving, in many cases, only the margin debt or loans owed to brokerage firms and banks which had extended credit based on those lofty equity values.
The downside, of course, to which Mr. Greenspan alluded, is that subprime woes do, in fact, spill over to other areas of the economy in a great unwinding of the debt-driven consumer culture of the last two decades, becoming a vicious circle of collapsing housing prices, home sales and foreclosures, layoffs and bankruptcies.
Greenspan also repeated a warning about the massive strain on the U.S. budget and the economy in the future from the looming retirement of nearly 80 million baby boomers, who will draw benefits from Social Security and Medicare.
He called the pending retirements "one of the seminal events in the first part of the 21st century in the United States." (Seminal: containing or contributing the seeds of later development - Webster's)
Greenspan said as medical technologies advance, costs for services and medicine also will change.
"There is a significant probability that under existing law, that we have overpromised what will be available to Medicare recipients," he said (emphasis mine).
Overpromised is the operative word and perhaps the understatement of the coming century.
(See my companion piece on this site: "Social Insecurity and the Coming Intergenerational Battle Over Entitlements" dated March 23, 2007)
Print
Email
