Former Fed Chairman Alan Greenspan was on Meet the Press yesterday and he shared a few sobering thoughts about the US economic recovery and what might lie ahead for the two markets that have been relative nonparticipants in that recovery – the faltering housing market and a labor market that seems stuck in reverse.
Some highlights from a man who now speaks with lucidity that lay dormant for 18 years while at the helm of the nation’s central bank, during which time a growing number of analysts think he drove the world’s only superpower into a rather large ditch…
First, on whether the economy will get worse before it gets better:
Maybe, but not necessarily. I think we’re in a pause in a recovery, a modest recovery. But a pause in the modest recovery feels like quasi recession. Our problem, basically, is that we have a very distorted economy in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it and are carrying what consumption there is. Large banks, who are doing much better, and large corporations, whom you point out and the – and everyone’s pointing out, are in excellent shape. The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long-term unemployment, that is pulling the economy apart. The average of those two is what we are looking at, but they are fundamentally two separate types of economy.
On the chances of a housing-led double-dip recession:
It is possible if home prices go down. Home prices, as best we can judge, have really flattened out in the last year. And while it is true that most economists expect a small dip from here, largely as a consequence of the ending of the tax credit, the data don’t show that at this particular stage. If home prices stay stable, then I think we will skirt the worst of the housing problem. But right under this current price level, maybe 5, 7 or 8 percent below is a very large block of mortgages which are underwater, so to speak, or could be underwater, and that would induce a major increase in foreclosures. Foreclosures would feed on the weakness in prices, and it would create a problem. So that – it’s touch and go.
On whether high stock prices are here to stay:
I wish I could answer that one. It’s a critical issue because, as you point out and as I’ve always believed, we underestimate the impact of stock prices on economic activity. Asset prices are having a profoundly important effect. What created the extent of the contraction globally was the loss of $37 trillion in market value. It collapsed the value of collateral in the system and it disabled finance. We’ve come all the way back–maybe a little more than halfway, and it’s had a very positive effect. I don’t know where the stock market is going, but I will say this, that if it continues higher, this will do more to stimulate the economy than anything we’ve been talking about today or anything anybody else was talking about.
Even in retirement, he’s been doing his best to get another asset bubble inflated to take the place of the one that burst. Clearly, it’s equity market’s turn to take the lead after the spent housing market – why doesn’t the rest of the world understand that?
We need to inflate another bubble, and fast!
Disclosure: No positions
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