Federal Reserve Chairman Alan Greenspan yesterday warned that new, liberal kinds of mortgages were helping to drive up home prices and fueling...
WASHINGTON — Federal Reserve Chairman Alan Greenspan yesterday warned that new, liberal kinds of mortgages were helping to drive up home prices and fueling the danger of a sharp price decline.
Greenspan said low-interest-rate mortgages also were contributing to what he termed “froth in some local markets.” He added he remains bewildered by the decline in mortgage and other long-term interest rates even as the Fed’s campaign to raise short-term rates enters its second year.
But on the whole, Greenspan, regarded by the public as more responsible for the economy than anyone except possibly President Bush, told the congressional Joint Economic Committee the economy was humming.
“You can’t get around the fact that this is the most extraordinarily successful economy in history,” he said.
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Nothing that Greenspan said led analysts to believe the Fed would soon abandon its course of raising short-term rates by one-quarter of a percentage point at each of its Federal Open Market Committee’s eight regular meetings a year.
The federal-funds rate — which governs overnight loans between banks — was at 1 percent, a historically low rate designed to boost economic growth, when the Fed began its campaign last June. Now it is at 3 percent and rising.
Greenspan quoted from the Open Market Committee’s statement following its May meeting, in which it said it believed it could raise rates at a “measured” pace without upsetting the rebound from the 2001 recession.
“We’re still in the middle innings of the Fed tightening,” said Mark Zandi, chief economist at the consulting company Economy.com. “He’s sticking to the script that he laid out.”
Zandi predicted the Fed would not pause before pushing short-term rates up another full percentage point, to 4 percent.
Some panel Democrats took issue with Greenspan’s upbeat tone. “I am concerned about what continues to be a disappointing economic recovery for the typical American worker,” said Sen. Jack Reed, D-R.I.
Wages are stagnant even as corporate profits are soaring, Reed said, and with energy and health costs rising, that is “squeezing the take-home pay of workers.”
Greenspan responded, “There is no question that this standard of living is unmatched, and it’s unmatched for everybody. Everybody has got a car, and the cars that people have today are so superior to what they were 50 years ago it’s unimaginable.”
Greenspan acknowledged some concern about the housing sector, which he said was overheating in some local markets. The National Association of Realtors estimated Wednesday that sales of existing homes would approach 7 million this year, topping last year’s record of 6.78 million.
Second homes bought for investment or leisure can be sold quickly because the owners do not live in them, and they account for much of the acceleration in sales, Greenspan said.
So do the “dramatic increase” in interest-only loans — in which the borrower does not begin paying off principal for several years — and “relatively exotic forms of adjustable-rate mortgages,” he said.
In addition to home sales, homeowners have been refinancing at lower rates and using the proceeds for current consumption. A sudden drop in home prices could leave them with mortgages greater than their homes’ value.
Greenspan called the drop in mortgage and other long-term interest rates “among the biggest surprises of the past year.” While short-term rates have climbed 2 percentage points in 12 months, he said, the rate on 10-year Treasury notes is down 0.8 percentage point.
“It’s the fastest decline that we have seen … in many decades,” he said. “So something unusual is clearly at play here.”
One factor, Greenspan suggested, is the entry into the global labor market of “educated, low-cost employment pools in China, India and the former Soviet Union.” These workers may be taking American jobs, but Greenspan said they were also exerting downward pressure on prices — including interest rates — around the world.
He was emphatic that the unusual behavior of rates did not presage what it often has in the past — an economic slowdown as banks were squeezed by falling income from their long-term loans and rising costs from their short-term borrowings.
In the global marketplace, he said, domestic banks are not the only source of the funds that keep the economy greased. Foreign central banks, for example, are financing much of the huge U.S. budget deficit.
As he often does, Greenspan deplored the deficit and said he supported Bush’s tax cuts only if spending cuts are other tax increases accompanied them.