[FoRK] "Debt is good"

Gordon Mohr gojomo at usa.net
Fri Mar 19 13:35:21 PST 2004


Russell Turpin wrote:
> Uncle Al says so. No, not your uncle Al the
> alcoholic who left behind a wide swath of
> bad debt when the state took over
> responsibility for his room and board. Your
> other uncle Al. Greenspan:
> 
> http://www.nytimes.com/2004/03/16/business/16FED.html?ex=1080409902&ei=1&en=a22ea7c749352c3c 

I think Uncle Al saw my devil's advocate post about rising
debt levels of February 9th, because he seems to be under the
sway of much the same reasoning. See:

    http://lair.xent.com/pipermail/fork/Week-of-Mon-20040209/028387.html

For the record, the Greenspan story text:

# March 16, 2004
#
# Greenspan Shifts View on Deficits
#
# *By EDMUND L. ANDREWS*
#
# *Correction Appended*
#
# WASHINGTON, March 15 ? Consumer debt is hitting record levels. The
# federal budget deficit is yawning ever larger. The trade gap? Don't even
# ask.
#
# Many mainstream economists are worried about these trends, but Alan
# Greenspan, arguably the most powerful and influential economist in the
# land, is not as concerned.
#
# In speeches and testimony, Mr. Greenspan, chairman of the Federal
# Reserve Board, is piecing together a theory about debt that departs from
# traditional views and even from fears he has himself expressed in the past.
#
# In the 1990's, Mr. Greenspan implored President Bill Clinton to lower
# the budget deficit and tacitly condoned tax increases in doing so.
# Today, with the deficit heading toward a record of $500 billion, he
# warns more emphatically about the risks of raising taxes than about
# shortfalls over the next few years.
#
# On Monday, the nonpartisan Congressional Budget Office published new
# calculations showing that the budget deficit now stems almost entirely
# from tax cuts and spending increases rather than from lingering effects
# of the economic slowdown.
#
# Mr. Greenspan's thesis, which is not accepted by all traditional
# economists, is that increases in personal wealth and the growing
# sophistication of financial markets have allowed Americans ?
# individually and as a nation ? to borrow much more today than might have
# seemed manageable 20 years ago.
#
# This view is good news for President Bush's re-election prospects. It
# increases the likelihood that the Federal Reserve will keep short-term
# interest rates low. And it could defuse Democratic criticism that the
# White House has added greatly to the nation's record indebtedness.
#
# Adjusted for inflation, the average family's debt, including a mortgage,
# has climbed from $54,000 in 1990 to $79,000 last year. Mortgage
# foreclosures, credit card delinquencies and personal bankruptcies are
# all at near record levels.
#
# Mr. Greenspan's view is that household balance sheets are "in good
# shape," and perhaps stronger than ever, because the value of people's
# homes and stock portfolios have risen faster than their debts.
#
# The Fed chairman is equally sanguine about the nation's overall
# borrowing from foreigners, which has soared to more than $500 billion a
# year and has contributed to a sharp drop in the value of the dollar. And
# he has also made it clear he will not try to torpedo the president's
# tax-cutting agenda, which could add another $2 trillion to federal
# borrowing over the next decade.
#
# "History suggests that the odds are favorable that current imbalances
# will be defused with little disruption," he declared in a speech two
# weeks ago.
#
# But a growing number of experts are worried that Mr. Greenspan is too
# casual. Though most economists agree that American's indebtedness is not
# a problem at the moment, many worry that the country has become too
# dependent on extraordinarily low interest rates that will inevitably
# creep higher in years to come.
#
# "The fear I have is that the world is leveraged on low-interest
# borrowing," said Allen Sinai, chief executive of Decision Economics, an
# economic forecasting firm. "It's like a drug, and you get hooked on it."
#
# According to the Federal Reserve's most recent data, household wealth
# bounced back after the economic slowdown and hit a record at the end of
# 2003.
#
# But the main reason for that new wealth has been rising prices for real
# estate and stock, and those prices have climbed in large measure because
# interest rates are at their lowest level in more than 40 years.
#
# If inflation rises and the Fed feels forced to raise interest rates,
# many economists worry that monthly debt burdens would rise at the very
# moment that housing prices start to decline.
#
# "The day of reckoning is not now, but maybe five years from now," said
# James W. Paulsen, chief investment strategist at Wells Capital
# Management. "To go down Greenspan's route is like saying there is a free
# lunch. The fallacy is that net worth has gone up because debt went up.
# And that doesn't give me a good feeling."
#
# Other analysts have begun to dispute Mr. Greenspan's benign view of
# rising household debt. Mark Zandi, economist at Economy.com, said many
# other indicators suggest that financial stress has risen significantly
# in the last two years.
#
# Mortgage foreclosure rates, personal bankruptcies and credit card
# delinquencies have been rising steadily and are at record levels. Most
# of that stress has taken place in lower-income families, which is why it
# has not made a big impact on aggregate data about national wealth.
#
# "These people who have heavy debt don't have stable incomes," Mr. Zandi
# said. "They're the ones who are getting pummeled by the loss of
# call-center jobs. These are the folks who rely on two incomes, the ones
# who don't have any assets."
#
# Though Mr. Greenspan has not articulated a sweeping new view, his public
# comments on particular topics provide a mosaic of his thinking and
# suggest that he is groping toward his next big idea.
#
# Mr. Greenspan's last big idea came 10 years ago, when he correctly
# perceived that American productivity was growing much faster than
# official statistics suggested and that the country could grow much more
# rapidly without inflation than most experts believed at the time.
#
# But after having reduced the federal funds rate on overnight loans to
# just 1 percent, the lowest level in 46 years, Mr. Greenspan has presided
# over an explosion in home buying, mortgage refinancing and consumer
# spending fed by cheap money.
#
# Mortgage debt soared by more than one-third from $4.9 trillion in 2000
# to $6.8 trillion in 2003. And though many people borrowed against their
# houses to pay down more expensive debt from credit cards, nonmortgage
# consumer credit climbed by $300 billion, or about 15 percent.
#
# In a Feb. 23 speech to the Credit Union National Association, Mr.
# Greenspan made it clear that consumer borrowing cannot keep that pace
# indefinitely. But he said the rise in debt had been matched by a rise in
# real estate values and stock portfolios.
#
# "The surge in mortgage refinancings likely improved rather than worsened
# the financial condition of the average homeowner," he said. Though
# bankruptcy rates had climbed sharply, he continued, these were "not a
# reliable measure" of household financial health.
#
# Mr. Greenspan went on to note that household debt burdens had been
# rising for the last half-century as banks and other lenders extended
# credit to wider segments of the population.
#
# That leads to Mr. Greenspan's broader idea: that financial institutions
# have steadily expanded credit by developing complex new instruments like
# credit swaps to hedge their risks.
#
# Back in June 2001, the Fed chairman praised the use of new risk-scoring
# techniques to expand "subprime" lending to people with poor credit
# histories.
#
# "Such lending is favorable both to borrowers and lenders," he said in a
# speech to bankers that year. People with poor credit gained access to
# loans that would otherwise be unavailable, he said, while lenders
# obtained "the opportunity for higher returns."
#
# In numerous speeches, Mr. Greenspan has argued that advanced new hedging
# techniques helped financial institutions survive huge loan losses to
# telecommunications companies after the stock market bubble collapsed.
#
# Telecommunications companies raised $1 trillion between 1998 and 2001,
# only to lose hundreds of billions when technology spending collapsed.
#
# "Unlike in previous periods of large financial distress, no major
# financial institution defaulted," Mr. Greenspan told a conference
# sponsored by the British Treasury in January. Novel tools for hedging
# risk, he concluded, had created a "far more flexible, efficient, and
# hence resilient financial system than existed just a quarter-century ago."
#
# Mr. Greenspan has voiced similar thoughts about the United States' huge
# current account deficit, which reached a record $541 billion in 2003.
#
# Like many economists, Mr. Greenspan has described the deficit as
# unsustainably high and said it would have to come down. The most common
# way for that to happen is for the dollar to drop in value, which would
# make imports more expensive and exports cheaper.
#
# But he has also suggested that the country may be able to borrow more
# because investors have become far less wedded to their home countries.
# This declining "home bias," Mr. Greenspan said in a speech this month,
# "has enabled the United States to incur and finance a much larger
# current account deficit than would have been feasible in earlier decades."
#
# Many economists say Mr. Greenspan is correct about basic changes in the
# world.
#
# "There is really nothing unusual in what he is saying, and I happen to
# agree with him," said Janet L. Yellin, a former Fed governor who teaches
# economics at the University of California at Berkeley.
#
# But others say they are increasingly uneasy. If foreign lenders lose
# their appetite for American securities, the dollar will fall and
# interest rates are likely to rise. If interest rates rise, and Fed
# officials have made it clear today's rates are unsustainably low,
# household debt payments are likely to rise and real estate values could
# decline.
#
# "It really strains the imagination to believe that household balances
# are in that great shape," said David Rosenberg, a senior economist at
# Merrill Lynch
# </redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=MER>.
# "If you look at debt on a cash-flow basis, servicing the debt is not a
# great problem. But under a different interest rate scenario, the
# servicing costs become less manageable."
#
# But J. Bradford DeLong, a longtime Fed watcher at the University of
# California at Berkeley, cautioned that Mr. Greenspan had been right at
# times when many others were wrong.
#
# "I think he's wrong, but he's got a better track record than I have,"
# Mr. DeLong said.
#
# /*Correction:* March 17, 2004, Wednesday /
#
# /A front-page headline yesterday about the views of Alan Greenspan, the
# Federal Reserve chairman, on debt levels in the United States
# characterized his position on budget deficits incorrectly. While Mr.
# Greenspan has urged Congress to avoid tax increases as a way of reducing
# such shortfalls, he continues to oppose budget deficits. He has not
# shifted his view./
#
#
# Copyright 2004 </ref/membercenter/help/copyright.html> The New York
# Times Company <http://www.nytco.com/> | Home <http://www.nytimes.com/> |



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