Sunday, March 21, 2004

It's the 1920s all over again

Alan Greenspan, chair of the Federal Reserve Board, is floating a new economic trial balloon dismissing record-smashing levels of both federal and family debt as no big deal, giving the White House ammunition in its attempts to make their billionaire-friendly "temporary" tax cuts permanent. So says the New York Times for March 16, although not nearly so bluntly.

His thesis is that increases in personal wealth and growing sophistication of financial markets have allowed Americans and America to borrow much more today than might have seemed manageable just 20 years ago, when he was all but begging Bill Clinton to close a budget deficit a fraction of the one Bush is generating.

The argument for the first half of that is that even though
[a]djusted for inflation, the average family's debt, including a mortgage, has climbed from $54,000 in 1990 to $79,000 last year,
families are in "good shape" because the value of their homes and stock portfolios have risen faster than their debts, leaving them with an increased net worth.

The argument for the second half is, as it seems is everything else these days, globalization. He argues that
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."
That is, we can borrow more because investors no longer care where their money is so long as it's profitable.

Now, I admit I'm not an economist but it seems to me that this is a load of hooey. First,
[m]ortgage foreclosure rates, personal bankruptcies and credit card delinquencies have been rising steadily and are at record levels. [But m]ost 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,
says Mark Zandi, an economist at That is, it's not that Americans are doing fine, it's that rich Americans are doing fine.

What's more, those increases in wealth are being driven by extraordinarily low interest rates, which are at their lowest levels in 40 years. That keeps mortgage rates down, which supports a home-buying market and keeps prices up. Low interest rates also tend to drive buyers into stocks rather than instruments such as bonds whose yield depends on interest rates and thus now are low.

What that means is that Greenspan's sanguine view of debt and deficits, a view sure to be embraced by the Whitest House, works only so long as interest rates, rates which the Fed itself calls "unsustainably low," remain that way. If they rise, which they could easily do "if foreign lenders lose their appetite for American securities," we could be seriously screwed as consumer debt rises at the very same time that the value of assets is stalling or even falling.

And I guarantee you that at the first sign of upward pressure on interest rates, it will be blamed on "inflationary pressures within the economy" and coupled with a call for "wage restraint." And once again the very same people who are already suffering, already falling further behind, the ones who are now facing the foreclosures and the bankruptcies, will be the ones called on to actually make the "shared sacrifices" we'll be told are required.

Footnote: Why the title? Because this reminds me of the 1920s, a time of seeming economic boom that was to continue forever - and purely in theory could, so long as the delicate balance that kept it going was maintained. A bump, and it all came tumbling down, exposing the rot within that was hidden by the focus on the macroeconomic.

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