Thursday, September 20, 2007

Is a recession on the way?

What if Allan Greenspan is right and housing prices in the US tumble by around 15%? One possible scenario of such an eventuality has been sketched out by the Centre for Economic Policy and Research.

The main points of the study may be summed up as follows:

* The 15% drop in the price of the housing stock in the US would total $4 trillion in real terms
over 3 years. ($4,000,000,000,000.00) Yes that is a four followed by 12 zeros!!!!

* The above loss would translate into a decrease in wealth to the tune of $50,000.00 for each
homeowner. The above calculation assumes that we have 80,000,000 homeowners.

* Some parts of the country will face a 30% drop in prices while some others might not drop at

* Prices will not recover for a very long time, that is why it is called a bubble. The pre bubble
prices will not be retested for at least a decade and then only in nominal dollars.

* Job losses in the construction industry and related sectors could amount to over 1 million

* Financial crisis could deepen and spread.

* The negative "wealth effect" is estimated to bearound 5 percent of the change in the value of
the housing stock. The resulting contraction of $200 billion in aggregate consumer spending
combined with the associated job losses would result in setting the stage for a deep

Is it fair to excoriate Mr. Greenspan for the above mentioned failure? You bet that it is. If he had expected the above dire scenario then why didn't he take any measures to stop it or is this potential outcome composed only to attract attention and sell books? Would the real Greenspan step forward please? Don't hold your breath.

1 comment:

Kris said...

i think that a recession is coming and that people have been predicting for awhile now, but others have been in denial about it. Hopefully, the fact that people are starting to talk about something can be done soon enough to eliminate the worst of it.