Back when Alan Greenspan was Fed Chairman he dismissed the idea of a housing bubble and said simply that some areas were seeing a “bit of froth.” Now that that assessment–and many others–has been revealed to have been a hallucination, Greenspan sees the housing market as dropping at least 25% from its peak–maybe 30%. The US, meanwhile, is still likely to have a recession, though not a “severe” one, and the recovery of the economy in recent months is a conundrum. FT:
The former chairman of the Federal Reserve said: “I still believe there is a greater than 50 per cent probability of recession.” But, he said, “that probability has receded a little and I think the probability of a severe recession has come down markedly”…
The former Fed chief also said that it was “too soon to tell” whether the worst of the financial crisis was over, as this would depend on what happened to house prices. Mr Greenspan estimates that house prices will fall by another 10 per cent from their February levels, for a total peak-to-trough decline of roughly 25 per cent. If the economy is weak and the market overshoots, house prices could decline by another 5 per cent, he says.
On the recent recovery:
[Greenspan] admitted he was puzzled by recent economic data that suggests the economy stopped deteriorating around March. “A recession is characterised by significant discontinuities in the data,” he said. “It started off that way – there was a period of sharp discontinuity from December to March. But then it stopped.”
Mr Greenspan believes there is a “tug of war” taking place in the economy, with financial sector stress pulling one way and strong corporate liquidity pulling the other. Corporate liquidity is being eroded, but only gradually.
What will kill the economy? Consumers getting responsible again:
The main risk he sees is that the household savings rate will move up more rapidly than most analysts expect as home equity falls, the labour market weakens and access to credit declines.
A rise in the savings rate (excluding the one-off impact of tax rebates) would depress growth in consumer spending, possibly to the point where there is an outright decline in consumption.
This has not happened for many years. For instance, consumer spending grew every quarter during the 2001 recession.