Alan Greenspan, who only saw housing getting a little "frothy" in the first place, doesn’t seem to understand what it takes for prices to stabilize, nor how long this process is likely to take:
April 8 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said the drop in U.S. home prices will probably end “well before” early next year as the number of houses on the market diminishes, aiding an economic rebound.
``It will not be until early 2009 that we will get close to having eliminated most of this” home inventory, Greenspan told a conference in Tokyo today sponsored by Deutsche Bank AG and co-hosted by Bloomberg LP. “But it is very likely that home prices will stabilize well before that.”
Prices will stabilize before supply and demand are in balance? And what will make this inventory disappear by early 2009? This sounds like "Whole Cloth Economics"- making it up as he goes.
Treasury Secretary Henry Paulson wants to give the Federal Reserve "Broad powers and the necessary corrective authorities to deal with deficiencies". Obviously Greenspan failed to see the bubble coming, and doesn’t seem to understand what it takes to have it unwind. Ben Bernanke, the current chairman, doesn’t seem to be able to do any better. In May of 2007 he stated:
The subprime mess is grave but largely contained, said Federal Reserve Chairman Ben Bernanke Thursday, in a speech before the Federal Reserve Bank of Chicago. While rising delinquencies and foreclosures will continue to weigh heavily on the housing market this year, it will not cripple the U.S. economy, he said. The speech was the Chairman’s most comprehensive on the subprime mortgage issue to date.
“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited,” Bernanke said.
These problems should not have been difficult for the Fed to see. In June of 2006 a newly minted blogger from Gilbert, AZ [Way outside the Beltway and without the resources of the Fed.] came to this conclusion:
Appreciation has slowed or disappeared across the country. If [A report by Dr. James Gaines] is right, we can expect an increase in foreclosure sales. While this will most effect the subprime market, it can be expected to adversely affect the rest of the market as well. Loose lending practices, higher interest rates and declining home values could well combine to create the perfect foreclosure storm- and that would be bad for all of us.
I reached this conclusion in part based on research from the Federal Reserve, but apparently their chairmen don’t read their own research.
