Greenspan: Housing to Ease Market Blow
Wednesday July 17, 12:51 pm Eastern Time
By Joanne Morrison
WASHINGTON (Reuters) - A robust U.S. housing market will help consumers ride out deep stock declines sparked by a wave of corporate accounting scandals, Federal Reserve Chairman Alan Greenspan told lawmakers on Wednesday.
In his second appearance before a congressional panel in as many days, he also expressed confidence that despite the recent revelations of multibillion dollar corporate misdeeds, the foundation of the U.S. economy remained undamaged.
"Yes we have had a reversal of the wealth effect, but it has been very significantly tempered by the continued existence of growth in home equities," Greenspan told the House of Representatives Financial Services Committee.
Before fielding lawmaker questions, he repeated cautiously optimistic formal remarks given on Tuesday before a Senate panel.
In the second leg of his twice yearly testimony on the economy, the Fed Chief told lawmakers that he believed the housing market -- a key economic underpinning -- will not collapse and that the run of accounting woes has not cut to the heart of the economy.
"As far as I can see, the underlying structure of the economy, its underlying efficiency, has not been materially impacted (by the accounting scandals)," Greenspan said.
"TINDER" HAS VANISHED
Of the accounting misstatements, the Fed chief said that with the stock market boom over, most of the "tinder" that proved "the attraction to do things which people ordinarily wouldn't do" is gone.
Despite his trademark caution, Greenspan said that once the shocks from last year's recession, the Sept. 11 attacks and the stock market tumble subside, "we're poised for a reasonably good expansion."
Nor does he see the housing market, a mainstay of the economy through the downturn, at risk of over-inflation.
"The type of underlying conditions that create bubbles are very difficult to initiate in the housing market," Greenspan said. "It is not an issue on the table on the moment."
His comments came as the government's latest data on Wednesday showed a 3.6 percent falloff in new housing construction projects started in June.
The firestorm of controversy surrounding such companies as Enron and WorldCom have helped drive down major stock indices lows not seen in years.
Stocks were trading higher on Wednesday as the Fed chief appeared before the House committee, erasing some of a seven-day losing streak. The Dow Jones Industrial Average at noon was up 77 points, while the while the tech-laden Nasdaq Composite Index gained 26 points.
But even with Wednesday's stock market improvement, lawmakers peppered Greenspan with their concerns that the declines suffered over the past several weeks could hamper the already week recovery, particularly in the key area of consumer spending, which fuels two-thirds of economic growth.
"So long as home wealth, the value of homes and the equity (consumers) have in them continues to increase, that is clearly going to significantly temper the impact that the decline in stock prices has had," the Fed chairman said.
Rising consumer debt levels are also not a worry, he said, maintaining they largely reflect an increase in home ownership and home values.
"Mortgage debt has not been going up faster than the rise in the market value of homes," Greenspan said, adding that diversity of housing markets in the United States and the high transaction costs involved in selling a home made a bubble developing "most unlikely."
The powerful central banker was not alone Wednesday in his attempts to cheer the market.
White House economic adviser Glenn Hubbard agreed that the stock market drop was a key risk to the U.S. recovery, but predicted the economy would still grow moderately this year.
"Even if the decline in stock market wealth we are seeing were permanent, the effect on consumer spending would be relatively modest as long as consumer incomes remain strong, and there is every reason to believe that they will," he said in an appearance on C-SPAN television network. |
