The Credit Bubble and Bubble Brains

Yesterday, I was lamenting the lack of sound economic thinking in the media. Well, here's a perfect example of economic stupidity, from none other than Alan Greenspan.

Greenspan, however, said it was unlikely that either the high level of household debt or the big rise in housing prices represented serious threats to the economy because Americans appeared to have sufficient resources to keep meeting their loan payments.

And how are they meeting those loan payments? By borrowing money from an imaginary equity in their home and spending it (equity doesn't become equity until you are holding it in your hand.). So, we're borrowing money to buy stuff, and then borrowing more to keep up the payments. That's why the debt level is soaring. This cycle can't continue...never has, never will.

"Short of a significant fall in overall household income or in home prices, debt servicing is unlikely to become destabilizing," Greenspan said.

Check the income statistics...real income is DOWN. Thats why we're having record bankruptcies.

Greenspan said that it would take "a large, and historically most unusual" decline in home prices to wipe out the equity that Americans have in their homes. He said about three-fourths of all mortgages are taken out by buyers who put up a 20 percent downpayment, which would be enough to cover even a very significant drop in home prices.

Translation: Its perfectly fine if you loose the 20% you put down on your house.

"While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity," Greenspan said.

Translation: You can still get a good deal in Appalachia.

He noted that household debt has been rising faster than incomes for at least the last 50 years as Americans have enjoyed rising levels of discretionary income, which they have used to buy more and more items on credit.

Debt rising faster than income for 50 years...does that sound like a prescription for sound economics? If they had rising levels of discretionary income (real INCOME, not borrowed money), they wouldn't be going deeper into debt.

Debt satisfies your present at the expense of your future.
To begin learning about sound economic principles, visit The Mises Institute.
To learn more about the Credit and Debt Bubbles, and for a contrarian view on the economy, visit The Daily Reckoning.
It may save you a bundle of money.