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Jimmy James

Greenspan On House Prices & Risk

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Fascinating stuff - looks like he might be preparing the intellectual ground for the house price bust and his successors troubles, and his own toga roll of economic sage in retirement. A bit like the Kissinger model, tho perhaps a house price collapse will be Greenspan's 'bomb Cambodia' equivilant?


Mr Greenspan gave a brief history of monetary policy over the US central bank's 90-year history. Attempts to find simple rules or single indicators to guide monetary policy - such as the money supply, commodity prices or the yield curve have failed. Central bankers have to take into account a broad range of economic and financial indicators, in trying to understand the constantly changing structure of the economy.

The rise in stock, bond and house prices and the sharp rise in household wealth relative to income in recent years has been a particularly important development, he said, contributing to the very low personal savings rate and the build-up of household debt to fund asset purchases.

“Our analysis of economic developments almost surely will need to deal in greater detail with balance sheet considerations than was the case in the earlier decades of the postwar period,” he said. “Our forecasts and hence policy are becoming increasingly driven by asset price changes.”

The greater stability of the economy, with monetary policy and globalisation both playing a part, in part explains the rise in asset prices, he said. But it was dangerous to assume this would continue and that the low risk premiums that have boosted asset prices will be sustainable.

“Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”


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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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