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Tuesday, September 27, 2005

Greenspan, Bernanke, Bies, and Moskow

Alan Greenspan discusses the consequences of a leveling or decline in the housing sector, perhaps through higher interest rates.  Though it’s wrapped in cautionary language, he sees benefits from higher interest rates in addition to the usual arguments about fighting inflation and anchored expectations.  He believes higher rates make it less likely that consumers at the margin will take on risky debt, that the current account will fall, and that personal saving will increase:

Greenspan Say Speculation Adds to Home-Price Surge, Bloomberg: Federal Reserve Chairman Alan Greenspan said speculative buying may be driving housing prices and creating a risk for the U.S. economy because so many Americans rely on home appreciation to support their spending... The abundance of interest-only loans and ''exotic'' variable-rate mortgages ''are developments that bear close scrutiny,'' he said. The unconventional mortgages are letting buyers who barely qualify purchase homes at inflated prices, ... ''In the event of a widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses,'' Greenspan said. Any retraction in sales or refinancing raises the risk of an ''adjustment'' in overall spending. How much is an ''open question,'' he said… Sales of vacation houses, or homes that aren't always occupied by owners, are ''arguably at historically unprecedented levels,'' ... ''This suggests that speculative activity may have had a greater role in generating the recent price increases than ... in the past.''… Greenspan said if home purchases or refinancing declined, consumption would probably retrench and the saving rate would rise. This would also point to larger adjustments in the U.S. economy, he noted. ''Imports of consumer goods would surely decline as would those imported intermediate products that support them,'' he said. ''And one would assume that the U.S. trade and current- account deficits would shrink as well, all else being equal.''...

The Bloomberg story, however, omits this important qualifier:

Greenspan says gains offer a cushion, Reuters: …Though mortgage debt is rising, most Americans have built up so much equity in their homes that they could weather a price drop without serious harm, ... "The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices," Greenspan told the American Bankers Association. … he said some regions may be seeing unsustainable price gains. But he said that, at mid-2005, fewer than 5 percent of homeowners were highly leveraged -- which would make them vulnerable if prices fell -- on their loans.

See also Calculated Risk here on Greg Ip’s WSJ article on Greenspan's remarks and here for more on the Reuters and Bloomberg reports.  Greenspan’s research paper supporting his remarks is here.

Next, Ben Bernanke, a former Fed Governor and now Chief White House Economic Adviser, on the economy after the hurricanes.  Note that he says the Fed does not have to raise rates “violently,” not that rates shouldn’t go up:

Energy prices risk to US economy-Bernanke, Washington Post: High energy prices in the wake of Hurricanes Rita and Katrina pose a risk to U.S. economic growth, but inflation expectations remain well-contained, a top White House economic adviser said on Sunday. "The high energy prices are certainly burdening consumer budgets, … and certainly continued increases in energy prices are a risk for economic growth going forward," … But Bernanke … said low inflation expectations gave the Fed more flexibility than in past energy crises. "A very important factor is the fact that inflation expectations are well-controlled and well-contained, which means that the Federal Reserve, unlike the 70s, doesn't have to react violently in terms of raising interest rates to contain the second- and third-round inflationary impacts. So I remain pretty optimistic about the economy," …Bernanke said the energy markets had been in the process of recovering from Hurricane Katrina when Rita hit… "I remain optimistic that the impact on energy from these two events will be limited." ... but warned that job losses in September would be heavy and that the unemployment rate would climb a couple of tenths of a percentage point. … "(But) as the economy begins to recover, as jobs are returned and as the rebuilding process continues and strengthens over next two years or so, the effects on national GDP growth and job creation will actually be positive," he said. "Basically, I'm going to be very optimistic today about the ability of the U.S. economy to absorb these body blows, and my reason for that is that I think this is an extraordinary resilient and flexible economy."

Last, but lately by no means least, here’s Chicago Fed president Moskow and Fed Governor Bies who spoke at separate events.  Both see a strong economy:

U.S. Treasuries Decline; Fed's Bies, Moskow Say Economy Strong, Bloomberg: U.S. Treasuries fell as two Federal Reserve officials said the economy remains strong after two hurricanes struck the Gulf Coast, bolstering views the central bank will keep raising interest rates. … Chicago Fed President Michael Moskow said ''the fundamentals of the economy are strong,'' and Fed Governor Susan Bies said there is ''underlying core resilience.'' A drop in crude oil to a two-week low after Hurricane Rita caused only minor disruptions at Houston-area refineries kicked off the declines in Treasuries in overnight trading. … ''It's early to see the results of Rita, but I think the fundamentals of the economy are strong,'' Moskow said  … ''All of the rebuilding that's going to be required is also going to show up in the economic numbers once we get through the initial impact,'' Bies said to reporters...

UPDATE: Federal Reserve Bank of Kansas City President Thomas Hoenig signals concern over inflation:

Fed's Hoenig says must be wary of inflation, Reuters: Federal Reserve Bank of Kansas City President Thomas Hoenig said on Monday that the U.S. economy can shake off the damage of hurricanes Katrina and Rita and the Fed must focus on its primary mission of keeping inflation at bay to ensure sustainable growth. "I believe it is also important for the Federal Reserve to stay focused on its primary mission for maintaining a neutral monetary policy that is both able to contain inflationary pressures and still-balanced growth," he told a Kansas City Fed economic forum here. Hoenig noted that the consumer price index has already pushed up significantly from a year ago, thanks to high energy prices, while unit labor costs were rising and economic capacity was being absorbed by the strong U.S. economy. "When you see all three coming together you must be alert," he said. "The mission of the Fed is to be sensitive to these pressures. … Hoenig said the U.S. central bank was not ignoring the human and economic tragedy along the Gulf Coast. But monetary policy acts on the national, not regional level, and no one would thank the Fed for taking its eye off the ball and allowing inflation to get out of control. "You can end up increasing inflationary pressures that could undermine the recovery if you are not careful," he said.

There isn't much ambiguity in that statement. 

    Posted by on Tuesday, September 27, 2005 at 01:48 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (12)


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