Greenspan on mission to bust bubble in housing

Greenspan seems to be on mission to bust housing bubble

August 31, 2005|By JAY HANCOCK

DON'T GET too thrilled about the $50,000 that the market just added to the value of your house, and whatever you do, don't blow it on a swimming pool or Corvette.

The Federal Reserve's Alan Greenspan knows about your prosperity and seems determined to stamp it out, if it's the last thing he does.

He made this clear last weekend.

"Our forecasts and hence policy are becoming increasingly driven by asset price changes," he told luminaries in Jackson Hole, Wyo., who were there to celebrate 18 years of Fed leadership by Greenspan, whose term expires in January.

Allow some translation. The "asset" is the rancher, Colonial, townhouse and condo. "Price changes" refers to the doubling in value of homes in many cities since 2000. "Policy" is the Fed's increases in short-term interest rates since last summer.

And now he's saying that one is driven by the other. He's saying the Fed's continued push to raise rates, which has surprised some of the smartest minds on Wall Street, is tied to high home prices and the Fed's desire to dampen them.

(OK, he didn't say, "I will pop the home-price bubble with a hatpin." But what else could he be talking about? Beanie Babies? Residential real estate is the only "asset price change" game in town. And the same speech mentioned "the housing boom.")

If the Fed has put out a contract on home prices, there are several reasons to take note.

First, there is the potential impact on your net worth and the economy. Second, it's a flip-flop by Greenspan, who for years rejected the notion that he should respond to soaring prices for homes, stocks or other assets and has long talked about home-equity loan proceeds as economic stimulants. Third, it's an unsettling case of mission creep by a powerful government agency.

A 1977 amendment to the Federal Reserve Act requires the Fed to seek "maximum employment, stable prices, and moderate long-term interest rates."

Doesn't say anything about stopping runaway real estate values. ("Stable prices" refers to purchasing power of the dollar, not asset prices.) But the Fed seems to be expanding its already considerable sphere of influence to include asset prices.

Greenspan deflects suggestions that he's gunning for the housing market by saying no central bank can "target" asset prices, although he doesn't rule it out for his successors.

But this is a nondenial denial. Targeting, in central-bank speak, means aiming narrowly at a specific, announced price level or rate of increase. But that's hardly necessary if all you want to do is throw a big, soaking blanket on the home craze.

When Greenspan started raising short-term rates last year some prominent economists thought he would quit or at least pause by the end of 2004. Now people expect him to keep tightening until his term expires in January.

And he's not even using consumer prices, the Fed's ancestral bogeyman, as an excuse. Oil prices are nuts and inflation is accelerating, but on Aug. 9 the central bank's official statement said, "Core inflation has been relatively low in recent months, and longer-term inflation expectations remain well contained."

No, the concern seems to be home prices. My guess is that Greenspan secretly regrets not attacking the 1990s asset-price issue - the stock market bubble - with earlier interest-rate rises. I bet he has visions of an even worse meltdown in home prices if the current trend is allowed to persist a year or two longer, with soaring mortgage defaults, banking trauma, bond turmoil, threats to Fannie Mae and Freddie Mac and multibillion-dollar federal bailouts.

I bet that's the last thing he wants as his legacy. And I bet he'll keep raising short-term rates and cutting off the money supply - they amount to the same thing - until housing cools or his term ends, whichever comes first.

The risk, of course, is that by doing so he'll trade theoretical future harm for guaranteed damage now. The hot housing market has accounted for a very large portion of U.S. job growth the last two years, and Fed tightening will hurt every sector, not just that one.

Is Greenspan promoting "maximum employment" by going after home prices? Or harming it?

In Jackson Hole he warned that "history has not dealt kindly" with the aftermath of asset booms. Yeah, especially when central bankers are there in the background, giving history a push.

Stock traders offer traditional wisdom for times such as this, when the money spigots are being turned tighter: "Don't fight the Fed," they say, meaning, "Don't expect stocks to keep going up." Homeowners, pay attention.

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