Fed Chief: High Debt? No Problem!

The record level of debt being carried by American households and soaring home prices do not appear to represent serious threats to the U.S. economy, Federal Reserve Chairman Alan Greenspan said Tuesday.

Greenspan said that high levels of personal bankruptcies were a concern because they indicated "pockets of distress" among American households. But he said the vast majority of U.S. consumers "appear able to calibrate their borrowing and spending to minimize financial difficulties."

In a speech before America's Community Bankers, the organization that represents smaller banks in the country, Greenspan sought to play down worries about the high debt levels being carried by American households as a percentage of their after-tax incomes and the steep increases in home prices in recent years.

Some economists have expressed concerns that the big rise in home prices could represent a bubble that may deflate just as the stock market bubble did starting in the spring of 2000.

Greenspan, however, said it was unlikely that either the high level of household debt or the big rise in housing prices represented serious threats to the economy because Americans appeared to have sufficient resources to keep meeting their loan payments.

"Short of a significant fall in overall household income or in home prices, debt servicing is unlikely to become destabilizing," Greenspan said.

Greenspan said that it would take "a large, and historically most unusual" decline in home prices to wipe out the equity that Americans have in their homes. He said about three-fourths of all mortgages are taken out by buyers who put up a 20 percent down-payment, which would be enough to cover even a very significant drop in home prices.

He also said it was more difficult to generate a nationwide housing price bubble because of different forces at play around the country, but he conceded that price bubbles could be created by conditions in local markets.

"While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity," Greenspan said.

Greenspan said he did not want to totally dismiss the threats to the U.S. economy from increased levels of consumer debt, but he said that some overall statistical measures seemed to be overstating the problem.

He noted that household debt has been rising faster than incomes for at least the last 50 years as Americans have enjoyed rising levels of discretionary income, which they have used to buy more and more items on credit.

Greenspan said that one factor pushing up debt levels has been the increase in the number of Americans switching from renting to owning their own homes in recent years as the housing industry has enjoyed record sales levels driven by the lowest mortgage rates in more than 40 years.

Overall, Greenspan said, "Household finances appear to be in reasonably good shape."

By Martin Crutsinger