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As Economy Thrived Under Greenspan, So Did Debt
Alan Greenspan steps down next week after 18 years as Federal Reserve chairman.
(By Pablo Martinez Monsivais -- Associated Press)
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These national figures combine all U.S. households, but debt tends to weigh most heavily on low-income families, other analysts note.
Many households with incomes below $50,000 a year, the bottom half of the income distribution, have mortgages at higher interest rates, plus car loans, student loans and credit card debt, said Mark Zandi, chief economist at Economy.com. "Their balance sheets are a mess," and they will have a harder time as interest rates rise, he said.
Indeed, U.S. households collectively spent more than their combined income in the second and third quarters of last year. The only way to do that is by selling assets, dipping into savings or borrowing.
When questioned on Capitol Hill in June about criticism that the Fed's strategy had helped inflate a housing bubble, Greenspan suggested that such imbalances were an acceptable price for avoiding another depression or a Japan-like economic stagnation.
"We knew that in the process of what we were doing -- that is, addressing the consequence of a very severe deflation of a [stock] bubble -- carried with it potential side effects," Greenspan said. "As best we can judge, things have turned out reasonably as we had expected, both positively and negatively, but in our judgment, the positive effects of the policy far exceeded the negative ones."
If Greenspan's strategy of raising rates in small, steady steps works, rising interest rates will cause the housing market to simmer gradually, households will save more, and the trade gap will narrow without great damage to the overall economy.
If so, Greenspan will go down in history with his reputation untarnished.
As Beverly Wilmore put it, as she recounted her family's recent experience, "We've prospered."
