Lawmakers Struggle to See Beneath the 'Froth' in Greenspan's Testimony

Federal Reserve Chairman Alan Greenspan described the housing market as
Federal Reserve Chairman Alan Greenspan described the housing market as "froth," not a bubble. (By Joe Raedle -- Getty Images)
By Dana Milbank
Friday, June 10, 2005

The chairman of the Federal Reserve wanted to make one thing perfectly clear: There is no housing bubble. No sirree. What's going on in the overheating housing market right now is properly described as "froth."

"There do appear to be, at a minimum, signs of froth in some local markets," Alan Greenspan said.

What's more, the maestro added, "the apparent froth in housing markets may have spilled over into the mortgage markets."

Greenspan had already tried this froth line on a New York audience a few weeks ago, but he liked it so much he used it three times yesterday before the Joint Economic Committee. For those who missed the first two references, Greenspan again reminded them that "certain elements of froth are clearly developing in local markets."

It sounded as if the Fed chairman had been moonlighting as a Starbucks barista. "I have this image of thousands of PhD students in economics running to a thesis adviser and changing the topic from 'irrational exuberance' to 'housing froth,' " mused Sen. Jack Reed (D-R.I.). Greenspan obliged him with a polite smile.

The semantic distinction -- what is froth but a foam of tiny bubbles? -- was vintage Greenspan. For 18 years, he has kept markets and policymakers guessing with his elliptical phrases and Delphic utterances -- for the most part, with good economic result. But now that same caution is obscuring a rather alarming point buried in his testimony: "We have to recognize that something very unusual is about to happen to this country."

Greenspan's is perhaps the only voice in the nation who could force Democrats and Republicans to do something about an out-of-control federal budget, entitlement programs and trade deficits before the retiring baby boomers crush the American economy. As the Fed chairman put it, in typical Greenspanese, "there is a not-insignificant probability that we have already committed under existing law and presumed demographics far more in real resources than we can actually deliver without significantly undermining the very base of the economic system." That's the Greenspan equivalent of a primal scream.

But instead of a real scream, Greenspan's hedging and dodging, delivered in avuncular and academic tones, left his listeners to take what they wanted from his testimony, much as they did in 2001 when they embraced his endorsement of tax cuts but ignored his suggestion that the cuts be rescinded if deficits develop. At yesterday's hearing in the Rayburn Building, it was the best of times and the worst of times.

The committee chairman, Rep. Jim Saxton (R-N.J.) declared the economy "on solid footing," and found homeownership "at record highs" and low inflation.

The ranking Democrat, Reed, up next, described "a disappointing economic recovery," widespread "economic insecurity" and growing inequality.

It took Sen. Jim DeMint (S.C.), a freshman Republican, to comb through Greenspan's riddles. "Today, you have described our short-term economic situation as steady, as sound," DeMint told Greenspan. "But reading between the lines, I think what you have said about a long-term scenario, I think if we contemplate that for a few moments, it seems very alarming."

Indeed, woven through Greenspan's fuzz were ominous threads. He said the growing wage inequality "is not the type of thing which a capitalist democratic society can really accept." He observed that "a significant amount of domestic production is essentially owned by foreigners." He said the education of American students is "well below the median in the world." And he found "modest if any progress" preparing for the baby boom retirement.

Trying to put all that together, DeMint wondered, "is it fair to say that there should be a greater sense of urgency on this panel and in Congress in dealing with our education situation, our entitlements?"

But Greenspan, hunched in his chair, his chin 10 inches above the witness table, went into something about "implicit real resources."

Later, Rep. Ron Paul (R-Tex.) asked if Greenspan was being a bit too sanguine. "I just wonder if we might not be fooling ourselves about our prosperity" because of heavy borrowing, he said.

Greenspan, elbows on the witness table, demurred. Debt, he said, "in modest quantities does enhance the rate of growth of the economy and does create higher standards of living, but in excess, creates very serious problems."

Rep. Elijah E. Cummings (D-Md.) pleaded with the chairman to elaborate on his concerns. Given the problems with the schools and the problems with an aging population, "what do you see for our future?"

Greenspan chose this moment to forget his worries and cares. "Every decade or so, we look forward and it looks awful," he said, but "we somehow, by some means, seem to re-create ourselves."

The chairman, acting as if he were a mere spectator in economic policy, said he had "trust" that the country would deal with the problems this time, too. "My inclination is just to say, 'I don't know how it's going to happen, but we'll do it.' "

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