Greenspan's gone -- now what?

Posted: Mar 03, 2006 12:05 AM

Periodically over the past few years, I've either written about directly or alluded to a potential economic tsunami in the United States.
Don't look now, but America's housing market is on the edge of a plummeting precipice. More ominous still is that it's not just the houses themselves that are a concern. All those second mortgages on homes have been serving as credit cards made not of plastic, but of brick, wood and stucco. These financial foundations may not be able to bear the weight of their debt.

 Recent surveys and industry reports confirm that sales of existing homes are slowing, and prices are starting to drop. It's happening in some regions of the United States more than others, but trends are emerging.

 And still, condominiums and luxury homes continue to sprout like pricey weeds. Trouble is, they are often built and bought on money borrowed to finance speculation.

 How did we get here? My answer has remained consistent for years -- Alan Greenspan. He is no longer chairman of the Federal Reserve. That means it's left to his successor, Ben Bernanke, to withstand the pressures built up by years of Greenspan's policy of shaving interest rates, to the point that money has flowed like water and consumer debt has always seemed manageable.

 And Greenspan initiated the seemingly endless series of interest-rate cuts only after having first raised them -- unjustifiably -- during a period of computer and other technological advances in the late 1990s, which he dubbed one of "economic exuberance."

 Coupled with President Bush's tax cut -- which wisely countered some negative effects of a recession and Sept. 11 -- these interest-rate cuts gave average Americans the idea that the value of real property would always rise. Far too many people have succumbed to temptation and borrowed heavily to make luxury purchases they otherwise would have avoided.

 Now the unthinkable is being thought. Housing markets are stalling, and there looms the real possibility of a panicked sell-off, more in some regions than others.

 Many people have invested in real estate rather than in the stock or bond markets, or plain-ole savings or money-market accounts. Now many of them are trying to capture the inflated value of the homes they bought with borrowed money, before that value plummets below their debt levels.

 The situation isn't unprecedented. Housing markets in the late '70s toppled in similar fashion. And rental properties imploded after the passage of the 1986 tax overhaul.

 Even more troubling are new findings from the U.S. Treasury Department that reportedly estimate the federal deficit may be far bigger than officially reported.

 Whether all of these factors will amount to an eventual economic catastrophe remains to be seen. But simple logic says it's inconceivable that any family can withstand the pressure of debt beyond their equity, and that they will have to try to salvage what they can once they see "For Sale" signs popping up in front of the houses on their streets.

 Now, believe it or not, I'm going to do something I've never done before -- praise Alan Greenspan. For one thing, he specifically said, before he left the Fed, that he was having increasing concerns about federal and personal debt, and housing markets.

 And to his credit, Greenspan acted correctly in the early 2000s when he lowered interest rates and then raised them.

 The problem? In both cases, he acted either too soon or too late and went too far with the levels of hikes and cuts.

 It's really remarkable that the U.S. economy has been faring so well.
Think about the recent setbacks to it -- terrorist attacks and the subsequent wars and other expenses they brought about; the collapse of confidence in publicly held companies, thanks in large part to the Enron debacle; and a string of natural disasters, culminating (so far) in Hurricane Katrina.

 My gravest fear is that these high economic times have been supported by a false economy, one in which people have freely spent borrowed dollars they may not be able to repay without pain.

 Obviously, if this phenomenon becomes widespread, it will bring spending to a screeching halt. That would hurt consumers and businesses, as well as the local, state and federal governments that rely on them for income and sales taxes.

 Many Americans may come to find a new and disconcerting meaning to the adage, "There's no place like home."