Fed Loyalist, Housing Alarmist

Greg Ip has recently penned two notable articles for the Wall Street Journal dealing with, what else, the real estate boom/bubble/many local bubbles/froth (pick one):

June 9th - In Treating U.S. After Bubble, Fed Helped Create New Threats
June 12th - What Happens If Real Estate Goes Bust

As recounted in yesterday's post, it was the June 9th article that Rep. Saxton referred to before asking Fed Chairman Alan Greenspan whether, in retrospect, Fed policy following the bursting of the bubble in 2000 was the best course of action. We don't know much about Greg, but we like him a little more with each passing day (since last Thursday, at least).

Interestingly, when Greg is Googled, number one on page one is a UCLA Anderson School of Management bio. The folks at the Anderson School of Management, you'll recall, are notable housing bears - or, as some might say, one of the few voices of reason amid the din of today's real estate speculative excess ... but we digress.

So, let's get right to the conclusion here, and we'll fill in details as we go along. The two articles can be neatly summarized as follows:

Housing may wreak devastation that will make the Nadaq bust look tame, but don't blame the Fed, they were just doing their job.

Fed Loyalist

Thursday's article, while roundly criticized by Bill Fleckenstein for, among other things, omitting the part about the Fed creating the bubbles in the first place, appears to be an honest account of the way the Fed sees the world.

Not that the way the Fed sees the world makes sense, mind you. The notion that the biggest stock market bust in history is logically followed by the mildest recession in recent history is apparently how the Fed believes the world should work, and that certainly does not seem to make sense:

The Fed is confident these imbalances will be resolved with little pain. As it raises interest rates, consumers will slow their spending and save more. Foreigners' appetite for U.S. goods will rise. The engine of U.S. growth will shift smoothly from consumers and government to business investment and exports. Fed Chairman Alan Greenspan might address this when he testifies on the economic outlook to Congress today.

But a minority of economists warn of a more damaging scenario. Some say the Fed has simply replaced the stock-market bubble with one in housing, which could burst. That would sap the consumer spending that mortgage refinancing and home-equity loans have fueled. Or foreign investors could stop buying U.S. stocks and bonds, sending the dollar down and inflation up, prompting both the Fed and bond market to jack up interest rates sharply. In either case, the U.S. economy could slow sharply or fall into recession.

Mr. Greenspan knew his strategy carried risks. But he saw far greater ones in responding timidly as the collapse of the biggest asset bubble in history wiped out more than $5 trillion in shareholder value, and terrorist attacks, war and corporate scandal rattled confidence. The economic expansion to date suggests he was right, and the odds are that he will retire as scheduled next January with his reputation for economic stewardship intact. But if a collapse in housing prices or a run on the dollar triggers a new recession, Mr. Greenspan's legacy may be different.

The Fed loyalism is clear here, and understandable - this is the Wall Street Journal after all. It is nonetheless refreshing to read an accounting such as this, and read the questions such as they are posed, in the mainstream financial media. For that, Greg and the Wall Street Journal should be thanked.

It's hard to imagine the brain trust at CNBC discussing such weighty issues as these on SquawkBox.

Housing Alarmist

Sunday's article carried a distinctly different tone - short on history, and quick to the point - perhaps filed late in the day on Friday, after many had already left for the weekend (if not in body, then in mind). Maybe a result of further contemplation by the author, after receiving rave reviews on Thursday's piece, basking in the afterglow of the attention it garnered on Capitol Hill:

Five years ago, the bull market for stocks came crashing to a halt after a glorious run. Now, many worry that the roaring housing market may be headed for a train wreck as well.

While house prices aren't likely to deflate as quickly as a hot Internet stock during the dot-com bust, the consequences have the potential to be far more devastating.

Since 1941, stocks had never declined three years in a row until 2000-2002. The fact they did reflected the magnitude of the preceding run-up. Housing prices have not seen a sharp drop in 30 years, but they've also never risen as much as they have since 1995.

It is presumed that "trainwreck" and "far more devastating" are not phrases that are used lightly at the Wall Street Journal. Even the counter-argument seems to have been selected such that it can be easily discredited:

"How could you have a housing crash?" asks Ted Aronson, managing partner at Aronson Johnson Ortiz, a Philadelphia money manager. "We all just sell our houses and move into a trailer park?"

No, Mr. Aronson, no trailerparks, but if the 25% of home sales that went to investors last year all of a sudden start looking like liabilities instead of rising assets, there could be hell to pay if these get dumped back on the market.

It seems that while Greg knows he has to be careful in what he says about Fed policy, he is a little less reserved when filing a weekend article about the housing market.