Greenspan Expects Housing Boom To End, U.S. Economy To Adjust

Central bank governor warns against inflationary fiscal policy

Cooling of the housing market in the United States could induce necessary adjustments in the U.S. economy by reducing cash available for consumer spending, Federal Reserve Chairman Alan Greenspan says.

"An end to the housing boom could lead to a significant rise in the personal saving rate, a decline in imports and a corresponding improvement in the current account deficit," Greenspan August 27 told a conference, which is reviewing the legacy of his 18-year tenure as the head of the U.S. central bank.

Greenspan has repeatedly said that the U.S. current account deficit, which has grown in recent years to record levels, as well as current account surpluses of its major trading partners are likely to adjust in an orderly fashion if the U.S. economy maintains its open and flexible character.

He projected that U.S. home sales will eventually decline from current record high levels and home price increases will either slow down or decrease. As these prices adjust, consumers will not be able to take out as much cash from home equity as they have in recent years. As a consequence, their spending will decline, he added.

How painful the adjustments will be will depend on the degree of flexibility of the U.S. economy and those of its major trading partners, Greenspan said.

On August 26 at the same conference, Greenspan said that enhanced flexibility increases an economy’s ability to adjust automatically to inevitable and often unanticipated disturbances, thus "reducing the reliance on the actions of monetary and other policymakers, which have often come too late or been misguided."

Greenspan said that increased flexibility has helped the U.S. economy weather several serious shocks in recent years. (See "Greenspan Cautions Against Protectionism, Lax Fiscal Policy.")

He said that monetary policy in coming years must be attuned to changes in the economic environment caused by technology and the aging of the U.S. population. Greenspan said this policy cannot ignore inflationary pressures from budget deficits projected to last until 2015, particularly inflationary pressures related to budgetary commitments to future retirees.

Greenspan predicted that even after his departure from the Federal Reserve in January 2006 the U.S. central bank would resist any "temptation" to finance those deficits by printing more money.

"We had too much experience with the dangers of inflation in the 1970s to tolerate going through another bout of dispiriting stagflation," he said. "The consequence for both future workers and retirees could be daunting."

Greenspan has called on Congress to reduce spending in general and reform the public pension system in particular to bring budget deficits under control.

Source: U.S. Department of State

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