I know Michael already discussed Federal Reserve Chairman Alan Greenspan’s recent speech to the National Association for Business Economics, but there’s more to the story that I want to tell today.
New research, conducted under the supervision of America’s favorite 79-year-old financial talking head, shows that Americans are funding their spending by borrowing against the equity in their homes. This study has been ongoing since 1999.
While, at the present, interest rates are relatively low, Greenspan warns that once they start rising we could see less spending from consumers. I, for one, didn’t need a six-year study to come to this conclusion. It’s just common sense.
Greenspan, however, needed data from the research to show that $600 billion was spent thanks to borrowing against home equity to convince him that spending could slow down in the months ahead.
Greenspan said this is happening in part because the lower interest rates (which, may I remind you, he created) for mortgages encouraged people to refinance their homes and increased the popularity of home equity loans. It is estimated that half of home- borrowed money is spent (a.k.a. wasted) on goods and services.
However, once we see interest rates continue to increase (which is also a result of Greenspan’s policies), Greenspan warned that the borrowing and, by default, the spending would be curbed.
While Greenspan had previously stated that many people do not buy and sell homes quickly because moving costs are expensive, when it comes to secondary mortgages, there are no moving costs, which “suggests that speculative activity may have had a greater role in generating the recent price increases that it customarily has had in the past.”
Greenspan is a firm believer that “home equity extraction” is a marker in supporting the economy. To me, when I see that “home equity extraction” is needed to support our economy, I can only conclude that we’re in for big trouble ahead. “Home equity extraction” means that all of the other resources available to Americans for funding their spending (salary increases, personal savings, investment returns, and other vehicles for borrowing funds) have been exhausted.
As Michael already said, Greenspan is coming up with all of these timely warnings to cover his tracks before he leaves his post as the head of the Fed.
What a legacy.