Alan Greenspan: Ultimate Hedge Man
Alan Greenspan was appointed to positions of high power by Presidents Ford, Reagan, Bush I, Clinton, and Bush II. While this may say something about the narrow range of views in national politics in the last thirty years, it also says a great deal about Alan Greenspan.
Alan Greenspan can boast some great successes in his public career. The most notable success was recognizing that the unemployment rate could fall below the 6.0 percent floor widely accepted by economists, without leading to accelerating inflation. This allowed for the boom of the late nineties, and forced economists to re-cook their theories.
But Greenspan’s greatest skill has been to carefully position himself on key issues so that he could cover his backside, regardless of what happened.
This ability has gotten a great deal of attention in the context of his qualified support of President Bush’s tax cut. He gave public testimony that was widely taken at the time as an endorsement of the tax cut. Of course he did include many qualifications, which were laid out in careful Greenspanspeak. Now that it is clear that the tax cuts lead to large deficits (which he doesn’t like), he has chosen to emphasize how he had qualified his support. Of course Greenspan could have emphasized his qualifications at the time – before the tax cut was approved – but he chose to let the public believe that he endorsed the plan.
Greenspan’s discussions in his book of the stock and housing bubble are similar. He sort of saw the bubbles, and sort of, kind of, tried to do something about them. But hey, what can the Fed do about financial bubbles? As Greenspan said, how could he think he knew more about financial markets than the collective judgment of millions of well-informed investors? (Put that comment in the no bubble category.)
Since the economy and the public pay a huge price for the distortions created by financial bubbles and their collapse, Greenspan’s hedge here is not very satisfying. For practical purposes, the Fed under Greenspan ignored both the stock and housing bubbles. The collapse of the former gave us the 2001 recession and the subsequent years of weak growth, in addition to wiping out pension funds and many individual retirement accounts. The latter bubble is likely to give us another recession and wipe out the life savings of millions of homeowners.
In this context, Greenspan’s hedges don’t seem very cute. History may not be as kind to Greenspan as our recent presidents.
The [housing] bubble is likely to give us another recession and wipe out the life savings of millions of homeowners.
A wipeout of "life savings"?
1967: Home purchased for $22,000
2006: Home valued at $400,000
2009: Home valued at $360,000
Ah, Cassandra!
September 24, 2007 8:10 AM | Reply | Permalink
The choice of wording is even poorer than you imagine, Ellen. He forgot to mention the even more aggrieved people paying a big chunk of their "life savings" to landlords over many years. When are we gonna get our bailout?
As a kid while my parents were trying to buy a house, I remember seeing brochures on becoming a homeowner as opposed to renting laying around, probably handed out by mortgage cos. or the Feds, with charts showing at what point you "break even" with renting, getting back your initial down payment, property taxes, maintenance costs, etc. And the grown-ups used to talk about renting as "throwing away money." I believe some of them were thinking along the lines their kids just getting that $22,000 back after they were gone, the $22,000 that others were paying to landlords, and not having to pay rent in their old age.
September 24, 2007 10:34 AM | Reply | Permalink
I perhaps wrongly assumed that readers were familiar with Greenspan's comment that he now expects house prices to decline by at least high single digit and would not be surprised by double-digit declines. (I expect a return to trend, which implies a real decline of 30-40 percent, since no economist has identified a shift in fundamentals to explain the recent run-up.)
Anyhow, if we take a Greenspan middle estimate of a 10 percent nominal price decline over the years 2006-2009 and then prices revert to their trend path (i.e. they stay even with inflation), this implies a real price decline of approximately 17.5 percent (2.5 percent annual inflation). That means that our family that buys a home in 2006 for $400,000 has a home that is worth $333,000 when they look to sell it in five or six years (the median length of homeownership). This would destroy $67,000 in wealth. Ranked by ratios of net worth to income, the median family in their forties was at a ratio of 2.05 in 2004 (this means that if the median family by this ratio had an income of $75k , it would have net worth of $153,500). In this case, the Greenspan price correction would eat up half of this family's net worth. The correction I expect would take up just about all of it.
Of course, people who bought before the bubble are still fine, as long as they didn't borrow excessively against their bubble wealth. Unfortunately many households did.
September 24, 2007 10:45 AM | Reply | Permalink
It looks like good news if you are a potential buyer. Equity gains are nice for existing owners but make it difficult to impossible for market entrants to afford housing.
The important point is that the place where you live is just that and NOT a speculative investment. "Gains" on sale mean nothing if on sale you need to purchase a replacement property at similarly inflated prices.
As for Mr. Greenspan, Bernanke and the Fed: how can annual increases in housing prices of 30% NOT be inflationary? If your models do not consider this inflation, your models are broken. Time to rethink.
September 24, 2007 11:21 AM | Reply | Permalink
1967: Purchased home for $22,000
2006: Sold home for $400,000
2006: Purchased home for $400,000
2009: New home valued at $340,000
Misery!
Alternative ---
1967: Purchased home for $22,000
Greenspan keeps interest rates high; jawbones; whatever ---
2006: Sells home for $300,000
2006: Purchases home for $300,000
2009: New home valued at $340,000
Happiness!
Egbert Sousé, Larson E. Whipsnade, or Micawber?
September 24, 2007 11:31 AM | Reply | Permalink
I caught Greenspan on Cspan the other night.
He talks in circles, always coming back to cover his wrinkly butt.
He mentioned how letting all people come work in the US and take the non-skilled positions will ultimately make the higher-paid positions come down in wages, and make the system FAIRER for all.
See, Greenspan says, it isn't how much you make, it is how you feel about how much you make. If you feel others are making 100 times more than you and that is unfair...then you FEEL poor. But as long as everyone is POOR-ish, and feels it is fairly distributed...we are happier. Might be true if Poor-Ish still paid the bills. Evidently, he has no idea what it would be like to have an income that is ALL GONE at the end of the month.
See, his other point is that right now we are subsidizing our high income workforce by the govt keeping others OUT. We need to stop subsidizing that chasm and let them all IN and that will make things fairer, tear down the subsidy, and make us all happier.
The guy is infuriating. We all know who he works for....Global Capitalists. They all soberly assess that we in the US need to pull our shorts down and grab-ankles...so that globalization can go about making more people more happy around the world. Makes sense if you are a globally invested capitalist. Makes no sense if you are a mid-income american.
September 24, 2007 12:51 PM | Reply | Permalink
But, but...
Roxanne Roberts of the Washington Post says that "Al" is a great kisser (on "Wait, Wait... don't tell me"). It must be true because Andrea told her.
Ceterum censeo Carthaginem esse delendam
September 24, 2007 7:13 PM | Reply | Permalink
Greenspan had to keep his mouth shut, he had a boss.
$440 billion$ for Iraq, and the President convincing the American people tax cuts are what are needed, an electorate so dumb they put him in power and his cohorts twice!!!!
September 28, 2007 4:38 AM | Reply | Permalink