Financial Big Shots Say US Has More Subprime Pain Ahead

The US subprime mortgage mess hasn’t ended. So say Former Fed Chairman Alan Greenspan, Governor of the Bank of England Mervyn King and rich guy George Soros. What is disconcerting is that they were not at a conference agreeing in a panel discussion but made their statements independently of one another. That’s a bad consensus for the US economy.

Mr. Greenspan told a business leaders' forum videoconference in Tokyo from Washington, “The critical issue on the whole subprime, and by extension, the international financial system rests very narrowly on getting rid of probably 200,000-300,000 excess units in [housing] inventory.” He added, “We still need to accelerate the rate of inventory liquidation, and that will mean bringing housing starts down and sales up. We have a long way to go.” Well, if housing starts drop, construction goes in the tank, and the US economy weakens further. Yet, it appears inevitable if that inventory is to be mopped up.

Mr. King told the BBC, “We have several more months to get through before the banks have revealed all the losses that have occurred, and have taken measures to finance their obligations that result from that, but we're going in the right direction.” Several more months is hardly an inspiring term, but it is hard to argue that everything has come to light. Earnings season for third quarter 2007 runs another week and a half, and who knows what surprises the fourth quarter will bring?

Finally, George Soros was lecturing at New York University in Manhattan when he said, “I think we are definitely in for a slowdown that I think will be a bigger slowdown than [Federal Reserve Chairman Ben] Bernanke is seeing.” If so, that means the Fed’s response will not be accommodative enough for economic conditions like a housing slowdown and $100 a barrel oil. When banks and builders get it wrong, their sectors suffer. When the Fed gets it wrong, everyone takes a hit.

Alan Greenspan, in his remarks, betrayed his own misunderstanding of just what’s going on. He said central banks need to keep monetary policy appropriately tight. He fears, “I'm concerned that we're moving from this 20- to 18-year disinflationary period and beginning to move in the other direction.” This journal disagrees. Rising prices across the global economy that stem from rising oil prices are not inflationary in the same way wage rises are. It cannot be fought with higher interest rates any more than a tax increase could be. Mr. Greenspan and Mr. Bernanke appear to offer only stagflation, which just isn’t good enough.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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