Working Papers

Greenspan’s Legacy

The Economist has a tired and predictable piece on Greenspan’s legacy:

The Economist’s long-running quarrel with Mr Greenspan is that he chose not to restrain the stockmarket bubble in the late 1990s or to curb today’s housing bubble.

My long-running quarrel with The Economist is that this argument is nonsense.  Peter Hartcher attempted to string a book out of this argument, with disastrous consequences that I review hereElsewhere, The Economist says ‘One should not exaggerate Mr Greenspan’s influence—both good and bad—over the economy,’ before going on to do precisely that.  The Economist’s cover story, ‘Danger Time for America,’ contains the usual tired predictions of housing-related economic ruin.  According to The Economist:

The problem is not the rising asset prices themselves but rather their effect on the economy. By borrowing against capital gains on their homes, households have been able to consume more than they earn. Robust consumer spending has boosted GDP growth, but at the cost of a negative personal saving rate, a growing burden of household debt and a huge current-account deficit.

The Economist just assumes that all this is a bad thing.  It is in fact a sign of economic strength, not weakness.  The Economist remains as wedded as ever to Bretton Woods era economics.

I picked up a copy of the second edition of Peter Garber’s classic Famous First Bubbles the other day.  The conclusion has a great passage explaining why The Economist’s incantations in relation to ‘bubbles’ are the hallmark of intellectual confusion:

“bubble” characterizations should be a last resort because they are non-explanations of events, merely a name that we attach to a financial phenomenon that we have not invested sufficiently in understanding.  Invoking crowd psychology - which is always ill defined and unmeasured - turns our explanation to tautology in a self-deluding attempt to say something more than a confession of confusion.

posted on 13 January 2006 by skirchner in Economics

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Regardless of whether there is a ‘bubble’ in the US housing market, you must surely agree there has been strong growth in recent times which will most likely come to an end soon.  At that point, there will be a commensurate slowdown in US consumer spending.  (Note: I’m not saying that a housing bust *causes* a slowdown, but they do seem to happen around the same time.  Look at the NSW economy).

If the US consumer stops spending, who or what takes over as the engine for global growth?  (I can’t believe Europe or Japan will take up the slack).  Who will buy Chinese goods, and if China slows, what will happen to commodity prices?

More bubble talk here, this time in the commodities markets:

Posted by .(JavaScript must be enabled to view this email address)  on  01/16  at  02:07 PM

Consumption is the thing I worry about the least.  It is the most stable component of GDP, because a large part of it is simply non-discretionary.  The NSW story is complicated by the vendor tax.

Posted by skirchner  on  01/17  at  10:22 AM

You can’t be serious about the vendor tax!

During its short life it only served to cancel out some of the tax advantages of investing in real estate (negative gearing, CGT concession, depreciation allowances etc).  If the housing downturn was all down to the vendor tax why are other states (e.g. Victoria) affected?  Why didn’t the housing market bounce back in NSW when the vendor tax was abolished? (as the REINSW promised us it would).

Anyway, is it not true that household spending grew only 0.3% in NSW for the September quarter?

Posted by .(JavaScript must be enabled to view this email address)  on  01/19  at  03:51 PM

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