There is No Housing Bubble Unless There Is One
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
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!