Alan Greenspan’s absurd statement in his testimony before Congress this
morning, that “As yet, the protracted period of monetary accommodation
has not fostered an environment in which broad-based inflation pressures appear
to be building,” is disturbing for two reasons. First, what is inflation
if not a “protracted period of monetary accommodation?” Then, by
claiming that the “protracted period of monetary accommodation,” i.e.
inflation, has produce no evidence of price pressures, Greenspan ventures form
the absurd to the ridiculous. Certainly the deluge of statistical and anecdotal
evidence clearly shows the opposite to be true.
When questioned about the rise
in the CPI, Greenspan claimed that despite “improvements” by
the BLS (Bureau of Labor Statistics), the CPI still understates inflation.
He supported his case by stressing the over-reliance of housing costs as a
component of the CPI. This ridiculous explanation proves that Greenspan isn’t
even a good liar. In truth, the CPI’s high housing component, which excludes
rising prices and only includes rents (artificially suppressed by low interest
rates), is one of the principal reason that the CPI understates inflation.
Just how gullible does Greenspan really believe the public is?
Perhaps there is a bit of honesty
in Greenspan testimony after all. Could it be that when Greenspan speaks
about the BLS having “improved” the
CPI, he is viewing the index from the Fed’s perspective, which would see a
CPI which misleads the public with respect to the true extend of the inflation
it creates, as an improvement? However, from the public’s point of view,
such a change is hardly an improvement.
When questioned if rising home prices truly represent increased wealth, Greenspan
chose to avoid answering the question by referencing the irrelevant example
of how to properly value a steel plant. Residential housing and steel plants
are two completely different types of assets. The addition of a steel plan
would in fact represent a true increase in wealth, as the steel plant’s value
could be determined by the income generated by its steel production. An increase
in the price of existing owner occupied housing produces no additional income
and mere changes in price do nothing to add to the true wealth of a nation.
Further, while a new steel plant
would represent a permanent increase in productive capacity, higher housing
prices will most likely prove ephemeral. This is important
because Greenspan points to higher wealth, as measured by increased housing
prices, to support his contention that consumer debt levels are not too high.
It is one thing to borrow to build a steel plant, where the revenue from steel
production can be used to service the debt and retire the principal, but it
is entirely different to borrow money to remodel a bathroom. Marble tiles produces
no income stream and housing prices could easily decline when interest rates
rise. The “wealth” will be gone but the debts will remain.
The fact that Greenspan raised the issue of steel plants at all proves he
knows that higher housing prices do not represent increased wealth. If he did
he would have addressed the question directly. After all, what do steel plants,
which are not being built, but shut down, have to do rising wealth in the U.S.
economy? Greenspan only brought them up as a distraction. He wanted to talk
about something that actually represented true wealth, thereby creating the
false inference that higher housing prices actually fell into that category,
without having to specifically make the laughable argument that they do.
Yesterday Greenspan falsely asserted that banks were well prepared for rising
interest rates. On the surface such claims might seem genuine, since most of
the real estate loans held by banks are adjustable, such as home equity loans
and lines of credit, and that most of the fixed rate mortgages have been repackaged
and sold off. A superficial analysis follows that banks will recoup higher
interest expenses though higher payments on their adjustable loan portfolios.
However, this conclusion overlooks the lax lending standards and questionable
collateral behind such loans. Rising rates will burst the housing bubble, resulting
in high levels of default with insufficient collateral. So contrary to Greenspan’s
claim, banks are therefore extremely vulnerable to rising interest rates.
Yesterday’s testimony also included
Greenspan’s official declaration of victory over deflation, the phantom menus
of the fed chairman’s own imagination. According
to Greenspan, the economic data of the last two weeks has proven that this “danger” has
finally passed. It seems to me that if such a “risk” truly existed,
a few positive numbers could not have eliminated it so quickly? Perhaps given
the new evidence, Greenspan simply realized how disingenuous he would appear
were he to continue the charade.
It is important to remember that Greenspan’s performance on Capitol Hill results
from his desire to delay the inevitable disaster that he knows his inept monetary
policy is sure to produce. Understanding his agenda is the only way to put
any of his statements in their proper context.