Jury still out on Fed chief's legacy
| • | A legacy of debt |
By Nell Henderson
Washington Post
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WASHINGTON — Beverly Wilmore is bracing for the tuition bills about to start rolling in after her 19-year-old daughter starts at Towson University this week. But she's not too worried — she figures she and her husband can borrow against their four-bedroom Gaithersburg, Md., home, which has appreciated from $250,000 when they bought it in 2000 to about $400,000 now.
And as the home's value rose, two years ago the Wilmores refinanced their mortgage, cutting their monthly home-loan payments by hundreds of dollars, she recalled.
Like many families who caught the housing boom, the Wilmores now have more debt than before they bought their home, but they also are wealthier. "I'm thankful for the low interest rate," said Wilmore, 42, a special-education teacher.
The Wilmores are among the millions of Americans who have prospered during Alan Greenspan's 18 years as chairman of the Federal Reserve. They lived through nearly two decades of generally stable economic growth with low inflation, low unemployment and modest interest rates. Under Greenspan's watch, the economy thrived despite stock market crashes, international financial crises, terrorist attacks, wars and other shocks. No wonder, as Greenspan prepares to retire this week, economists have lauded him as the greatest central banker ever.
Still, his legacy will be judged not just by his record at the Fed, but also by the economy he bequeaths. And when he leaves office Tuesday, Greenspan leaves a nation awash in debt — record household debt and a record trade gap.
Many analysts say his low interest rate policies added to these huge imbalances, which threaten the economy he nurtured.
"The jury is out on his legacy in large part because of the debt" and the trade deficit, said Stephen Roach, chief economist at Morgan Stanley. "You will not be able to truly judge his accomplishments until we see how this plays out in the post-Greenspan era."
Greenspan and his Fed colleagues agree that part of the growth in household debt and the trade gap is the side effect of policies that helped steady the U.S. economy after the stock bubble burst in 2000. The Fed's low interest rates encouraged consumers to borrow and spend on houses, autos and other goods, spurring economic growth for several years when businesses were cutting jobs and reluctant to invest. And consumers spent much of their borrowed money on imports, causing the trade deficit to swell. But in the view of central bank policymakers, the alternative would have been worse — a longer and more painful downturn.
Greenspan's Fed didn't do it alone, economists agree. Other factors helped fuel the borrowing binge, including global financial trends that have helped keep mortgage rates low and prompted lenders to extend more credit to more people.
The result is a prosperity built on borrowing, say many economists, pointing to a string of recent records and firsts:
"The economy's increasing reliance on unprecedented levels of debt is clearly unsustainable and extremely troubling," said Charles McMillion, chief economist with MBG Information Services, a financial analysis firm. "The only serious questions are when and how will current imbalances be addressed and what will be the consequences."
The Fed chairman told Congress in June: "I think we've learned very early on in economic history that debt in modest quantities does enhance the rate of growth of an economy and does create higher standards of living, but in excess, creates very serious problems."
Greenspan didn't define "excess," but economists see troubling possibilities: A sudden reversal in housing prices could trigger a recession if consumers cut back on spending and households have trouble paying their mortgages. The trade gap could swell to a point that forces a sharp fall in the dollar and surge in interest rates, also causing a recession.
Even without a crisis, the debt load will weigh on the economy simply because of the interest to be paid on it, which leaves less money to spend on other things and prevents living standards from rising as fast as they would otherwise, some analysts believe.
Household debt has risen faster in recent years than wealth or disposable income, reaching an unprecedented 126.1 percent of after-tax income in the third quarter, double its 1980 level.
However, all this debt isn't straining households so far. Late payments on credit card loans and other forms of consumer debt declined in the third quarter, the American Bankers Association reports.
