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. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan's successor to manage the bubble's aftermath.
How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.
One way or another, the economy will eventually eliminate both imbalances. But if the process doesn't go smoothly - if, in particular, the housing bubble bursts before the trade deficit shrinks - we're going to have an economic slowdown, and possibly a recession. In fact, a growing number of economists are using the "R" word for 2006.
And here's where Mr. Greenspan is still saying foolish things. In his closing remarks he suggested that "an end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports and a corresponding improvement in the current account deficit." Translation, I think: the end of the housing bubble will automatically cure the trade deficit, too.
Sorry, but no. A housing slowdown will lead to the loss of many jobs in construction and service industries but won't have much direct effect on the trade deficit. So those jobs won't be replaced by new jobs elsewhere until and unless something else, like a plunge in the value of the dollar, makes U.S. goods more competitive on world markets, leading to higher exports and lower imports.
So there's a rough ride ahead for the U.S. economy. And it's partly Mr. Greenspan's fault. MORE
The Fed is supposed to be independent. However, I'm sure Greenspan was called on the carpet by Bush and told it would now be Bush's way or the highway. I'm sure he cued him in on some of his plans to make it seem as if it was a partnership and Greenspan wanting to keep his job and influence signed on. I'm sure he's had some surprises along the way, but he is a man of his word. So he has been set up as the fall guy when it all falls apart.
Bush's "base" the super rich, are less tied to the economic conditions. These are the folks that capitalize on adversity, who are making billions on the war on Iraq, who will own all the homes that default when the housing bubble bursts. Bush played a high risk gambit, knowing that if it all went wrong, the economy could falter. But his base would still be happy. Now it is playing out as a worst case scenario.
Take a look at the state of the "recovery".
Associated Press
Even with a robust economy that was adding jobs last year, the number of Americans who fell into poverty rose to 37 million -- up 1.1 million from 2003 -- according to Census Bureau figures released Tuesday. It marks the fourth straight increase in the government's annual poverty measure. The Census Bureau also said household income remained flat, and that the number of people without health insurance edged up by about 800,000 to 45.8 million people.
[...]
While disappointed, the Bush administration -- which has not seen a decline in poverty numbers since the president took office -- said it was not surprised by the new statistics. MORE
There is no surprise that Bush says there is no surprise. This is the outcome he expected all along. Perhaps by next year the Administration will figure out how to pad the figures like Reagan did to the unemployment rate. For those that don't know, the only people counted as unemployed are those that register at unemployment offices. If you used up your unemployment and were still looking, would you register with the office? I think not.
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