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Alan Greenspan, on Friday, acknowledged “froth” in the housing market. He did deny that a nationwide housing bubble exists but apparently believes there are many smaller bubbles, hence the use of the word, “froth.” I consider this to be the strongest type of warning he is willing to make.

Here is a man famous for his choice of words. The term “Greenspeak” was not coined to refer to his flippancy with the language. The fact that he chose to use a word that strongly connotes, “salivary foam released as a result of disease or exhaustion,” should be worrisome to anyone familiar with the story of “Old Yeller.” While I don’t think that Greenspan has the same fortitude as did Travis, the boy in the movie given the task of putting Yeller down – this Federal Reserve would never do anything that might cause a whiff of recession – he does recognize that he’s got a rabid animal on his hands that threatens the stability of the national economy.

A study by the International Monetary Fund, reported on by the Economist, tells us what Greenspan already knows,

“…just as rising house prices help to boost spending, so falling house prices can cause economic pain. In an analysis of a number of earlier housing bubbles, the IMF’s latest World Economic Outlook found that output losses after house-price busts in rich countries have on average been twice as large as those after stockmarket crashes. The average real decline after a house-price bust has been more modest than after a stockmarket crash (30% over four years against 45% over two-and-and-half years), but at the end of that period GDP had fallen by an average of 8% relative to its previous growth trend, compared with 4% after a share-price bust. The IMF also found that a sharp rise in house prices in real terms is much more likely to be followed by a bust than is a share-price boom.”

It is a fact, then, that “froth” in the real estate market is far more dangerous to an economy (not to mention investors) than “froth” in the stock market. After the stock market bubble popped, in 2000, the Federal Reserve and Congress pulled out all the stops, lowering the Fed Funds rate and cutting taxes to prevent a mild recession from becoming something more severe. With the Fed Funds rate already historically low and lawmakers staring at large budget deficits in Washington as opposed to the surpluses of five years ago, the firepower to deal with another economic shock is severely limited. This may explain why Greenspan, lately, looks so much like a boy who’s Labrador has fallen ill.

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