So What Does Greenspan Think About The Economy?
On Monday, Alan Greenspan gave a cheery little speech that said the economy was doing just peachy keen despite the size of the consumer debt since so many people owned their own homes and because of low interest rates, the debt they carried was not a concern.
American households' finances are generally in good shape even though consumers have built mountains of debt and bankruptcy filings have surged, Federal Reserve Bank chairman Alan Greenspan said yesterday.
Decades of low interest rates and extra cash from refinancing have given people flexibility to better manage their debt, the Fed chief said in a speech to a credit union conference.
Consumer debt hit a record $2 trillion in December, according to the Federal Reserve's most recent figures. That debt includes credit cards and car loans, but not mortgages. More than 1.6 million people filed for personal bankruptcy in fiscal year 2003. Continuing the record-setting pace of recent years, personal bankruptcies rose 7.8 percent in the 12 months ended Sept. 30, according to the Administrative Office of the US Courts.
While elevated bankruptcy rates in the past several years are troubling because they highlight the difficulties some households experience during economic slowdowns, Greenspan said that "bankruptcy rates are not a reliable measure of the overall health of the household sector because they do not tend to forecast general economic conditions and they can be significantly influenced over time by changes in laws and lender practices."
Okay. As long as you don't lose your job or have a health problem and lack insurance or don't have some other emergency, it doesn't matter if you carry a lot of debt, because you were able to refinance your mortgage at low interest rates, thus freeing up money to spend on things and pay off your other debt. (Remember, consumer spending is a significant driver of the economy.)
So why does Greenspan turn around on Tuesday warning about catastrophic failure of the US financial system if the debt carried by the biggest Mortgage institutions, Fannie Mae and Freddie Mac, is not restrained?
Mortgage giants Fannie Mae and Freddie Mac could pose a threat to the country's financial system if their debt is not restrained, Federal Reserve Chairman Alan Greenspan said Tuesday, urging Congress to consider capping the debt the two Fortune 500 companies can carry.
Greenspan said the two institutions have grown to be among the largest financial institutions in the United States and now stand behind $4 trillion of home mortgages, or more than three-fourths of the single-family mortgages in the United States.
Greenspan said he believes both institutions have managed their financial risks well but said he believes risks would rise if the two institutions allowed their debt levels to grow in the future without restraints.
He said "future systemic difficulties" are considered likely, and he urged Congress to take action "sooner rather than later."
Doesn't the threat to these mortgage institutions arise from their inability to collect from the multitude of people who are buying their homes with mortgages from them? Does this say that despite his words from Monday, Greenspan really is worried about the current debt load of Americans? Or did I miss something? Perhaps he is worried about what happens when interest rates go up - as has been predicted will happen soon by everyone who believes the economy is doing quite well (especially since foreign bond holders are going to ask for more from their investment for backing the US spending spree).
Does anyone know if the Freddies provide variable rate mortgages? Is this the problem Greenspan is worrying about?
A final thought on Greenspan's words: In this piece Greenspan said: "Bankruptcy rates are not a reliable measure of the overall health of the household sector because they do not tend to forecast general economic conditions and they can be significantly influenced over time by changes in laws and lender practices."
What do you think he means by this? What changes can be used to "significantly influence" bankruptcy rates? Greenspan has long backed the so-called bankruptcy reform bill, where backers believe the result would lead to less bankruptcy. Perhaps this is because he believes that if people cannot declare bankruptcy, they will be more careful about their debt loads? Since most bankruptcies occur over things like the loss of a job or a health care emergency will we see debtors prisons or indentured servitute from the children or spouses of the debtors? Certainly, if there is no bankruptcy escape route, people who don't honor their debts will suffer. It should be a good lesson, don't you think?