Monday, August 29, 2005

The housing boom will cool, but investors need to show caution.

Houston Chronicle

On their weekly NPR radio show, The Motley Fool , brothers David and Tom Gardner play a game they call, "What Did the Fed Chief Say?" Contestants are awarded token prizes if they can decipher the pronouncements of Federal Reserve Board Chairman Alan Greenspan and translate them into statements that ordinary Americans can understand.

When a congressman once told Greenspan that he understood something the chairman had said, Greenspan responded, "Then I must have misspoken."

Approaching retirement from office next year, Greenspan addressed a Fed symposium Saturday in Jackson Hole, Wyo. Uncharacteristically, the chairman was fairly straightforward in his economic prognosis for the nation:

In sum, Greenspan predicted that several problems would work themselves out without heavily damaging the economy. Market forces would cause the housing boom to cool. When it did, consumer spending would drop and U.S. savings � now nonexistent for many households � would increase. When that happened, according to the chairman, the nation's disturbing trade deficit and dependence on foreign borrowing would decline.

Americans must hope Greenspan is right, as he has been on many important questions during his tenure as the nation's central banker. He is certainly correct on another issue he discussed:

The government's fiscal policy is unsustainable. Without spending cuts or revenue increases or both, the skyrocketing deficits of recent years will only grow worse as baby boomers retire and receive Social Security and Medicare benefits.

What did the Fed chief say? There is some reason for optimism, but a need for caution in business and investment. And if the deficits are not brought under control, all bets for a strong economy are off.