a speech to the Economic Club of New York this week, he said he would
not let a faltering housing market deter him from the necessary action
to wring inflation out of the system.
be in the future some stress in some areas, but broadly speaking I
think that consumer finances are enough to keep the economy at or close
to its potential output growth rates," he said. "The increase in
mortgage debt may not be a particularly serious problem."
Fellow governor Donald Kohn hammered
home the Fed’s hawkish strategy in blunter language during a speech in
Frankfurt. "If real estate prices begin to erode, homeowners should not
expect to see all of the gains of recent years preserved by monetary
policy actions," he said.
In other words, no mercy
now, and no bail-out later, regardless of warnings by financier George
Soros that Fed tightening could combine with sliding house prices to
cause recession in 2007.
Early signs of stress are already showing
at the edges, from Iceland, to Egypt, Turkey and Hungary. However, the
American housing boom is now the mother of all bubbles – in sheer
volume, if not in degrees of speculative madness.
Mr Bernanke’s steely line is all the braver given the
disquieting data coming from the East and West Coasts. January home
sales were down 14pc year-on-year in Massachusetts, and down 24pc in
California. Prices usually follow.
The levels of
US household debt are vertiginous, rising 8.6pc in 2000 from already
dizzy heights, then again 8.6pc in 2001, 9.7pc in 2002, 11.4pc in 2003,
11.1pc in 2004 and 11.7pc in 2005.
The Fed itself
has warned that millions of punters are "in over their heads" with
100pc mortgages and zero up-front interest costs. The personal savings
rate has turned negative for the first time since the early 1930s.
fitting testimony to the bubble, estate agents, surveyors, and the army
of workers linked to property made up 55pc of the 2m jobs created by
the US economy from 2000 to 2005, according to Moody’s.
The rolls of the National Association of Realtors have grown from 767,000 to 1.2m in five years.
Americans are now drawing down 6pc of GDP from the equity in their
houses each year, much of it to pay bills or splash out on a spanking
new V-6 Chevrolet Equinox.
Goldman Sachs estimates
that 68pc of this home equity withdrawal is spent outright on
consumption. It warned that the drag on growth could reach 1.5pc of GDP
by next year if property stalls.
It is portrait of a nation that is living further beyond its means than any advanced society has ever dared before.
Britain’s world-beating standards, the 13pc rise in US house prices
last year (35pc in Arizona, 27pc in Florida) seems paltry stuff. But
the two markets are chalk and cheese. America has abundant land, easy
planning laws, and now a record five-month inventory of unsold homes in
sprouting suburbs across the country.
It is hard
to believe that Mr Greenspan would have stood by impassively as this –
the biggest of all his serial bubbles – began to pop.