“If we could wave a wand and housing prices go up 10 percent, the subprime mortgage problem would disappear”

This was the wisdom offered by Greenspan, former Chair of the Federal Reserve, back in March of this year. His argument being that, if only house prices would continue their tropish long march forward, people could keep borrowing and re-financing against their Magic Home Equity, and the problem would go away.

Meaning, of course, that the problem would simply go forward, and wait for us, bigger and badder, a little farther down the road.

Jim Kunstler pulled out the back of a handy envelope, for his rejoinder at the time:

The median price for a house in my region of the US (northeast) was $380,000 in the third quarter of 2006. Median annual income, meanwhile, was about $46,000.

If, by some miracle (in a land of negative savings) someone with an income of $46,000 had managed to save enough to make a 20 percent down payment ($76,000) on the aforesaid median-priced house and got a 30-year mortgage for the remainder ($314,000) at 7 percent interest, his monthly payment would be $2089.

Add to that $250 a month in local property and school taxes and insurance and that brings it up to $2339. That adds up to $28,068 a year in house payments. Let’s say the poor bastard pays $8,000 a year in combined income tax and FICA witholding. That leaves him with a grand total of $9,932 for everything else.

So, if housing prices went up 10 percent, how fucked would Mr. Median Income be?

But now we have a new Alan Greenspan: Greenspan 2K, Greenspan 2.0:

Alan Greenspan, former chairman of the Federal Reserve, suggested Sunday that a tax break or other government financial help for homeowners facing the mortgage crunch would be the best political fix for the economy.

He cautioned against meddling with home prices or interest rates to address the housing problem.

Greenspan did not specifically call for a tax cut. Instead, he called for the government to apply money to the severe housing market slump. Such a cash infusion would typically come through a tax break or a new government spending program.

Yes, because meddling with the incomes of specific homeowners is a much safer route to follow than meddling with the prices of the incomes they own. Meanwhile we should, of course follow the svengalian wisdom of the man who blithely set us up for the bankrupted Fiscal policies and woefully under-regulated debt markets in the first place.

Separately, Greenspan said he is concerned about signs of a resurgence of inflation.

“Core inflation is up. Wholesale prices had their highest increase I think in a generation. That raises the specter of stagflation again,” said Greenspan, referring to a simultaneous stagnant economy and upward pressure on prices.

He said the Federal Reserve should “do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer term period.”

Greenspan said a large number of people are in major financial stress, even when they’ve tried exceptionally hard to make their monthly mortgage payment. But some political solutions would only prolong their agony, he said.

On this one, he should know. I believe he’s come back around to cashing in on criticising those monster deficits, off on which he signed (and around which he can dance like an angel on the head of a goddamn pin. It’s a sight to behold).


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