Greenspan: End of home boom inevitable
The housing boom will inevitably simmer down," Greenspan said in the prepared remarks. "As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease."
Greenspan said while he expects continuing debate over whether the Fed could and should use its power over interest rates to try to influence prices for assets such as stocks and homes, he did not think it was feasible to do so.
NOW you tell us??? Krugman is right to call you a hack in his column today:
Greenspan and the Bubble
Most of what Alan Greenspan said at last week's conference in his honor made very good sense. But his words of wisdom come too late. He's like a man who suggests leaving the barn door ajar, and then - after the horse is gone - delivers a lecture on the importance of keeping your animals properly locked up.
We are facing
the biggest bubble in world history:
NEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000. What if the housing boom now turns to bust?
According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.
(...)
Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.
See this graph:
These are relative numbers - the ratio of house prices to rents, so the absolute level is irrelevant. And the conclusion is unavoidable: America's ratio of prices to rents is 35% above its average level during 1975-2000.
And Greenspan is fully to blame for this, despite all the laurels he has been getting in recent days.
Krugman
At the conference, Mr. Greenspan didn't say in plain English that house prices are way out of line. But he never says things in plain English.
What he did say, after emphasizing the recent economic importance of rising house prices, was that "this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent." And he warned that "history has not dealt kindly with the aftermath of protracted periods of low-risk premiums." I believe that translates as "Beware the bursting bubble."
Or, in other words, there has been too much money around, prices of assets are going up and yields are going down, thus we need to take ever more risks to earn decent money on the markets. That's what I've been ranting on for weeks here, and it's exactly what Greenspan is saying now.
still Krugman
But as recently as last October Mr. Greenspan dismissed talk of a housing bubble: "While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely."
Wait, it gets worse. These days Mr. Greenspan expresses concern about the financial risks created by "the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages." But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."
If Mr. Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late.
Krugman also criticises Greenspan's flip-flop on the budget deficit (whereby he shamelessly encouraged the Bush tax cuts for the rich after having been - and before becoming again now - a deficit hawk).
And ne concludes, almost diplomatically:
So there's a rough ride ahead for the U.S. economy. And it's partly Mr. Greenspan's fault.
Well, I'll say it undiplomatically:
Greenspan is a hack. His misguided and politically motivated policies in the past 5 years (encouraging budget deficits and lowering interest rates too much) have flooded the world with too much money and fuelled the biggest asset bubble ever, a bubble whose pop will take us all down - and will hurt the weakest amongst us most.
Call it the Greenspan recession, and hope that it is not the Greenspan depression.