He's kidding--right?

Last February, Federal Reserve Chairman Alan Greenspan--whose loose money and easy credit policies unleashed a surge of mortgage lending and refinancing--made it clear interest rates would soon start to rise from their historic lows. He also suggested that homeowners who had refinanced mortgages as fixed interest rates have decreased should refinance again to adjustable rate mortgages. To do so would be economic lunacy, of course--but Greenspan obviously understood that mortgage refinancing is the only engine driving consumer spending, and thereby keeping the U.S. economy aloft.

On October 19, Greenspan dispensed another dose of his distinctive economic wisdom in a speech to a bankers' convention in Washington. Defending actions he has taken during his tenure as chairman of the Federal Reserve Board which led to a big increase in homeowner debt, Greenspan "disputed analysts who worry that home buyers have become swept up in a speculative housing bubble that the Fed is partly responsible for creating."

Insisting that many measures of household debt overstate the size of debt burdens, Greenspan pointed out that property values have also increased dramatically: "Taking into account this higher level of assets, all in all the household sector seems to be in reasonably good financial shape with only modest evidence of an increased level of household financial strain." He also dismissed concerns of a "speculative bubble" in the housing market by stating that it's harder to trade houses than stocks.

Private economists reacted to Greenspan's self-serving analysis by saying, in effect: "Alan--put down the crack pipe and back away from the printing press."

"He talks about how housing doesn't lend itself to being a bubble because it's harder to trade houses and you have to live in a home," observed Kathleen Bostancic, a senior economist at Merrill Lynch. "But ... it's happening in the UK and it has happened in Japan. It also happened here in the Northeastern United States in the early 90s."

What about household debt burdens? "You'd expect people going into the mid-50s would be paying off their debt," states Dean Baker, director of the Center for Economic Policy Research. "Instead, the percentage of equity is at record lows."

In 2003, observes MSN economics columnist M.P. Dunleavey, "consumer debt bit an all-time, record ... high of $1.98 trillion." That figure doesn't include mortgage debt. In 1993, she continues, "the average American's savings was an unimpressive 5.9% of disposable income. Ten years later, it had dribbled down to a mere 1.3%." This has led to the emergence of what is called "survival debt"--the use of credit cards to make up shortfalls in vital household expenses, including taxes.

Homeowners typically have used mortgage refinancing to pay off credit cards--something becoming increasingly difficult to do as interest rates rise, home values (in some markets) flatten, and credit lines dry up. But according to Greenspan, the key architect of this unfolding catastrophe, we're in "reasonably good financial shape."