Because the best things in life are free.

 
Big Al’s Big Day:

Once again Federal Reserve Chairman Alan Greenspan wrapped the world around his finger today by testifying before Congress. One thing he said caught my eye:

More broadly, rising home prices along with higher equity prices have outpaced the rise in household, largely mortgage, debt and have pushed up household net worth to about 5-1/2 times disposable income by the end of last year. Although the ratio of net worth to income is well below the peak attained in 1999, it remains above the long-term historical average. These gains in net worth help to explain why households in the aggregate do not appear uncomfortable with their financial position even though their reported personal saving rate is negligible.

Of course, household net worth may not continue to rise relative to income, and some reversal in that ratio is not out of the question. If that were to occur, households would probably perceive the need to save more out of current income; the personal saving rate would accordingly rise, and consumer spending would slow.

Apparently Al is not following the trends that closely. Most longtime homeowners have tapped into their equity to make ends meet. It could be just to pay off other debt, or it could be because they have gone back to school or have a new job that pays less. But even if that is oversimplification, Greenspan seems certain that if the housing market cooled people would suddenly start saving. Again, that seems sort of difficult when to use the equity in your house, you must borrow it.

Furthermore, if there is a real estate bubble present that could portend real economic pain. These two paragraphs are particularly eye catching because after his initial address, he signed off on personal accounts for Social Security insofar as it would increase personal saving. Just how indebted people will be able to pay off more of the debts by saving additional money is a mystery.
posted by Thomas at 9:53 PM 0 comments