Why the Two Spins on Housing and the Coming U.S. Recession

The battle of the economic know-it-alls:

In the one corner, we have the current Fed Chief Ben Bernanke, in his semi-annual report to Congress, stating that the damage to the economy caused by the fallout from the housing market is difficult to predict at this time. Bernanke, while happy with how the U.S. economy is slowing, acknowledges that consumer spending and housing-related industries will be hurt by the slowdown in the housing sector.

>From what I read in his remarks, Bernanke doesn’t know how bad the damage will be to the U.S. economy due to the housing fallout. However, he does acknowledge the relationship between the U.S. housing market and the economy.

In the other corner, we have former Fed Chief Alan Greenspan saying the worst is over for the U.S. housing market and that there will be no economic spillover effects from the poor housing market. Greenspan also says the U.S. could be headed for a recession by the end of this year.

At first, Greenspan didn’t qualify the probability of a recession happening. In later speeches to economic groups, he quantified the probability of the U.S. falling into a recession as having a 30% chance.

And now the referee’s take:

On the spillover effects of the weak U.S. housing market and the economy: Bernanke is right; Greenspan is wrong. There is no doubt in my mind that the U.S. will suffer economic headaches from the worsening housing market. We can already see it in the subprime industry where lenders are under immense pressure — some have stopped taking loan applications. Bernanke, while not a real estate man, is calling it right in this respect.

On the possibility of the U.S. recession this year: In a Profit Confidential I wrote in late 2006, that’s exactly what I forecasted. Greenspan is right. The U.S. will fall into a recession in late 2007 or early 2008. But it’s not a 30% chance of happening. In my opinion it’s only a 30% chance of not happening!

As for Bernanke, he’s the current Fed Chief. He cannot come out and forecast a recession because confidence in the markets would be severally shaken. Bernanke is a smart man. And if I were a betting man, I’d wager Bernanke does have serious concerns that the U.S. is slowly moving into recession territory.