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July 19, 2005
House Prices No Object: So Says Mr. Greenspan
So reports Greg Ip, in today's Wall Street Journal (page A2 of the print edition):
Recent warnings by bank regulators on risky housing-related lending aren't meant to rein in a potential bubble, Federal Reserve Chairman Alan Greenspan said.
"The regulatory system is not designed to influence or control asset bubbles, but rather to ensure that bubbles, should they develop, do not lead to unsafe lending practices," Mr. Greenspan said in a letter to Rep. Jim Saxton (R., N.J.), chairman of the Joint Economic Committee of Congress.
The remarks, dated July 11 and released yesterday by Mr. Saxton's office, show the Fed has rejected using either of its major tools -- monetary or regulatory policy -- to rein in housing prices...
In May, the Fed and other bank regulators warned lenders about interest-only home-equity loans, loans made with little or no documentation of the borrower's credit-worthiness, and higher loan-to-value and debt-to-income ratios. Similar guidance on mortgage loans is expected.
But Mr. Greenspan said the guidance isn't a form of bubble-pricking. "It was a response to indications that some banks were not appropriately managing risks in the home-equity area," he wrote.
The letter itself reiterated this...
As I indicated in my testimony, there does not appear to be a "bubble" in home prices for the nation as whole, but there are signs of "froth" in some local markets where home prices seem to have risen to unsustainable levels. It is not clear whether lending practices have contributed to these local conditions.
... and included a fairly rousing defense of the policy course of the past four years, couched in terms that reveal an entirely conventional representation of how monetary policy works:
The Federal Reserve aggressively eased monetary policy over the course of 2001, in response to factors that were tending to weaken the U.S. economy...
Absent the monetary stimulus applied promptly by the Federal Reserve in 2001, that recession could have been considerably deeper and more costly for our nation. The sharp reduction in money market interest rates resulting from our monetary policy actions fostered a considerable easing of broader financial market conditions. Longer-term interest rates fell particularly notably... The drop in yields provided substantial support to interest-sensitive spending-- especially housing, but probably to expenditure on consumer durables and business investment as well. Without the more accommodative financial conditions... the result could have been a much more severe economic downturn.
There is also this benign take on the flattening of the yield curve. Again from the WSJ:
The shrinking gap between short-term interest rates and long-term bond yields isn't a "foolproof indicator of economic weakness," Mr. Greenspan wrote. Moreover, forecasting models based on that gap spell "continued moderate" growth "for the foreseeable future," he wrote.
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