Greenspan's 'Age of Froth' is over for decade
Post-bubble age is prompting painful bailouts, as the world economy reels from a credit crunch and writes down bad debts.Stocks 52 Week: High | Low | Gainers & Losers | Only: Buyers | Sellers
By Bloomberg |
CHICAGO : One of the most humbling challenges we scribes face is to attach a meaningful name to an era. How do you describe a time of obscenely easy credit; stock and housing bubbles; stratospheric Wall Street profits, outlandishbanker salaries and general prosperity?
Now that the post-bubble age is prompting painful bailouts, as the world economy reels from a credit crunch and writes down bad debts, it���s time to consider what I call the ���Age of Froth���.
Not only will the aftermath of this epoch be ripe with bankruptcies, foreclosures and bailouts, it will be a time of great reckoning. Building equity and saving will be vital.
I derive the concept of froth from former Federal Reserve chairman Alan Greenspan, who told Congress on July 20, 2005, that ���the apparent froth in the housing markets appears to have interacted with evolving practices in mortgage markets���.
Greenspan���s remarks coincided with the peak of the bubble, when US median home prices hit $230,200 that July. We may not see house values reach that level for another decade or so.
More disturbing about Greenspan���s observation is his acknowledgement that interest-only adjustable mortgages that were used ���to purchase homes that would otherwise be unaffordable��� may leave ���some mortgagors vulnerable to adverse events���.
As it stands now, that was the financial understatement of this young century. Greenspan and the Fed - with the exception of former governor Edward Gramlich, who wrote a prescient book about mortgage abuses - did nothing to curb these ���exotic��� mortgages, hence the current crisis.
Of course, since the housing frenzy was immensely profitable for the real-estate/construction industry as well as mortgage, investment and savings banks, Greenspan and his fellow regulators became notably sheepish,
if not cowardly.
���To the US financial industry, the froth translated into ���$1.2 trillion in excess profits over the past decade relative to nominal gross domestic product growth,��� said Jim Reid, a credit strategist for Deutsche Bank in London. Reid says banks may lose a total of $1.2 trillion, when the books are closed on the ���Age of Froth���.
Greenspan, who wrote a 2007 report with economist James Kennedy on home-equity extraction for the Fed, found that American homeowners pulled more than $800 bn out of their properties, most of them going into even more debt to tap the bubble profits.
Now that the post-bubble age is prompting painful bailouts, as the world economy reels from a credit crunch and writes down bad debts, it���s time to consider what I call the ���Age of Froth���.
Not only will the aftermath of this epoch be ripe with bankruptcies, foreclosures and bailouts, it will be a time of great reckoning. Building equity and saving will be vital.
I derive the concept of froth from former Federal Reserve chairman Alan Greenspan, who told Congress on July 20, 2005, that ���the apparent froth in the housing markets appears to have interacted with evolving practices in mortgage markets���.
Greenspan���s remarks coincided with the peak of the bubble, when US median home prices hit $230,200 that July. We may not see house values reach that level for another decade or so.
More disturbing about Greenspan���s observation is his acknowledgement that interest-only adjustable mortgages that were used ���to purchase homes that would otherwise be unaffordable��� may leave ���some mortgagors vulnerable to adverse events���.
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As it stands now, that was the financial understatement of this young century. Greenspan and the Fed - with the exception of former governor Edward Gramlich, who wrote a prescient book about mortgage abuses - did nothing to curb these ���exotic��� mortgages, hence the current crisis.
Of course, since the housing frenzy was immensely profitable for the real-estate/construction industry as well as mortgage, investment and savings banks, Greenspan and his fellow regulators became notably sheepish,
if not cowardly.
���To the US financial industry, the froth translated into ���$1.2 trillion in excess profits over the past decade relative to nominal gross domestic product growth,��� said Jim Reid, a credit strategist for Deutsche Bank in London. Reid says banks may lose a total of $1.2 trillion, when the books are closed on the ���Age of Froth���.
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For homeowners, froth came in the form of home equity. As it was seen as easy ���money on the house���, this bubble-inflated bonanza was mostly cashed out. Now millions are tapped out in their credit and savings kitties. Greenspan, who wrote a 2007 report with economist James Kennedy on home-equity extraction for the Fed, found that American homeowners pulled more than $800 bn out of their properties, most of them going into even more debt to tap the bubble profits.
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