There is No
Housing Bubble Unless There Is One
By Duru
May 22,
2005
"Greenspan
sees no housing bubble" (CNN Money, May 20, 2005)
"Greenspan:
'Local bubbles' build in housing sector" (USA Today, Money, May 20,
2005)
"Greenspan Is
Concerned About 'Froth' in Housing" (New York Times, May 20, 2005)
"Alan Greenspan Calls
U.S. Housing Market `Speculation' Unsustainable" (Bloomberg, May 20,
2005)
Greenspan is a
master wordsmith. In one answer to a question
regarding the much feared, but as yet unidentified, housing bubble, the general
media was able to conclude that a housing bubble does not exist, that a bubble
only exists on the local level, and that a bubble does indeed exist. This is classic Greenspan, and it does a
disservice to serious analysis (the
FDIC did an analysis in 2004 that echoes some of Greenspan's claims below. The article also makes it clear that, at the
very least, the credit risks we face are very serious). Certainly, given his position, he must watch
what he says lest he roil the markets, but how can we take this kind of
psycho-babble seriously? As best as I
can tell from those above article, here is what Greenspan said to the Economic
Club of New York on Friday. I have had
to cobble the bits and pieces together since these remarks came in a Q&A
session and are not included in the
transcripts from the main speech:
"There are a few things that suggest, at a minimum, there's a
little froth in this market. While we don't perceive that there is a national
bubble, it's
hard not to see that there are a lot of local bubbles. There is a very significant acceleration in
the turnover of
First of all,
can the honored chairman just speak plain English FOR ONCE?! Instead of "it's hard not to see that
there are a lot of local bubbles", how about simply "there are a lot
of local bubbles." I know it is too
much to ask for a specific accounting of how many and what size local bubbles
equals one national bubble, so I will leave that wish in Fed fantasyland. Greenspan in this comment misses the main
point of why we should be concerned about rising housing costs. We do not care so much that we have been
unable to reduce home prices, we do care that wages are not rising fast enough
to keep up with housing costs. All
across the country, folks living in the midst of these "local
bubbles" are increasingly being priced out of the housing market, and
those that choose to dive in anyway are forced to devote large portions of
their cash savings and recurring incomes to cover housing costs. We do not care that home building has
suffered from "slow productivity growth." This economic technicality is of little
comfort: all it says is that those with the supply are able to extract large
economic rents from buyers because the buyers want homes faster than they can
be built. Sure prices have support under
this system, but the system itself is not healthy and does not contribute to
overall economic well-being. Slow
productivity growth is called "inefficient" for a reason. Greenspan loves to extol the virtues of
productivity growth in the rest of the economy, so I am quite surprised that he
receives comfort knowing that the critical housing sector does not participate
in this productivity miracle. This
represents amazingly convoluted logic if you ask me….and I know you did.
Now, if what
we are witnessing is an "unsustainable underlying pattern," why not
just call it a bubble? Nobody really
knows what the heck this pattern looks like or what it means, but we sure have
been trained to fear and understand a bubble (well, except the Fed perhaps). So what if these forces are not
"infinitely projectable", whatever that
means?! We can spend some time doing
serious analysis of what is happening in the here and now, examine the history
of bubbles, and look forward just 5 or 10 years to paint a whole host of
scenarios for study and debate.
Greenspan uses a weak excuse to say that without having a crystal ball
of omniscience, he cannot be held responsible for generating some informed
insight. Heck, he seems free and willing
to spend all sorts of time and energy making predictions about the energy
markets, social security, federal deficits, international trade, currency markets….amazing
that he gets so hesitant about housing.
I can appreciate that the housing bubble has saved us from the stock
market bubble of 2000, but Greenspan and the Fed are derelict in their
collective duty by not having a frank discussion with the country about the
potential dire implications of this sleight of hand.
Lastly,
Greenspan indirectly contributes to the bubble mentality with this
irresponsible statement: "Even if there are declines in prices, the
significant run-up to date has so increased equity in homes that only those who
have purchased very recently, purchased just before prices actually literally
go down, are going to have problems."
First, it tells those of us who have not bought into the bubble yet to
hurry up and get in before we get caught holding the bag. Second, it is a callous economic calculation
to say "to heck" with the suckers who cannot time this bubble well,
at least a sufficient number of folks should be cushioned by the hyper-inflated
value of their homes. We would not have
taken comfort in such statements in January, 2000 as a bubble-popping loomed in
the stock market. Why then is Greenspan
so confident that housing has inflated so much that it is safe from the most
likely declines on the horizon? Would we
have dared to make such a pronouncement about the stock market? I do not think so. The stock market bubble that popped was
unprecedented and there is every indication that the bubble building in housing
is reaching a scale of historic proportions.
Under these conditions, we dare not predict who is safe and who can be
safely sacrificed lest we all suffer completely.
Bill
Fleckenstein does an excellent job in "The Fed sees bubbles --
and keeps them secret" calling out the Fed's dishonesty when it comes
to discussing these serious dislocations in the economy. I have noted Greenspan's insistence in pleading
ignorance about bubbles. We are
always hearing that we cannot know there is trouble until trouble has
happened. Essentially, there is no
housing bubble unless there is one. We
will know we had a bubble once it has popped, and we begin the process of
counting all the bodies. What more can
we ask for, eh?
Be careful out
there!