FED SPEAK (via mc):

Greenspan Indicates Fed To Continue Raising Rates: Private Social Security Accounts Are Given Cautious Endorsement (A WALL STREET JOURNAL ONLINE NEWS ROUNDUP, February 16, 2005)

U.S. consumer spending has been "well maintained," buoyed by growth in disposable income and gains in net worth, particularly through rising home values and low interest rates, Mr. Greenspan said. But consumers are saving much less, an average of just 1% of income, compared with the 7% average of the previous three decades, he noted.

However, rising home values and stock markets have outpaced the increase in household debt, bringing the ratio of household net worth to income above historical averages, Mr. Greenspan said, adding that a reversal in that trend could prompt Americans to save more. [...]

Touching on one of the hottest issues in Washington -- President Bush's proposal to reform Social Security -- Mr. Greenspan repeated his call to Congress to take action to shore up the massive entitlement programs of Social Security and Medicare. Those programs face huge financial strains with the looming retirement of 78 million baby boomers in 2008.

"Benefits promised to a burgeoning retirement-age population under mandatory entitlement programs, most notably Social Security and Medicare, threaten to strain the resources of the working-age population in the years ahead," Mr. Greenspan said. "Real progress on these issues will unavoidably entail many difficult choices. But the demographics are inexorable and call for action."

During opening questioning by the Senate panel, Mr. Greenspan offered a cautious endorsement of proposed personal retirement accounts, saying it is unclear how financial markets would respond to this type of "forced savings."

New government borrowing needed to make the transition to these personal accounts could make bond-market conditions more difficult if the markets see it as an unfunded liability adding to the long-term national debt figure, rather than part of a long-term process to bring the national debt down, he said.

Mr. Greenspan said "in general" it's wrong to make policies that add to the government's budget deficit, but the partial transformation of Social Security to personal accounts is "one of the very rare cases" where increased deficits may not decrease national savings. However, he acknowledged such a transformation would technically shift savings from the government to the private sector. The Fed chairman said he is still trying to get a sense of how the financial markets would interpret the effect on national savings.

What a deranged notion, that if housing prices and stock markets were to begin a period of decline that people would save more. Only in professional economics is it better to be homeless with $100 dollars in the bank than living in a house you've half paid off, but the monthly mortgage check takes your account to $0.

Posted by Orrin Judd at February 16, 2005 12:21 PM