Greenspan: "the traditional fixed-rate mortgage may be an expensive method of financing a home"

Axel Merk, February 23rd 2004
This article was written by Merk Investments before the Merk Hard Currency Fund was launched.

In a speech at the Credit Union National Association, Greenspan today said that homeowners "might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade." He continued: "American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage."

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Short-term or variable rate mortgages are the better deal in an environment with sinking interest rates, such as what we had in the past decade. However, as the Bank of England has warned, many consumers are not aware of the risks posed of short-term debt exposure in a rising interest rate environment.

There are already numerous variable and short-term instruments available for the sophisticated (or naive) homeowners. Greenspan's speech is an encouragement to use these short-term instruments. As the Wall Street Journal comments, "It is almost unheard of for an official of the central bank to offer advice on interest rates, over which it has enormous influence."

We would go much further than this: unless Greenspan clarifies his comments, he must resign. Calling on homeowners to leverage their personal finances using short-term debt is a financial distress call. Greenspan must be desperate to get consumers to take ever more money out of their homes, to inflate home prices. He can only make such a statement if he knows short-term rates will stay low for years to come, at any cost. The "cost" will be sharply higher long-term rates and a faltering dollar.

We very much hope that Greenspan will put his words into perspective. It is our view, however, that Greenspan is indeed desperate and means exactly as he said. Greenspan's entire monetary policy has been based on wealth creation through higher real estate prices; he is taking this concept to new levels thereby risking an unprecedented real estate bubble, and a subsequent collapse of unprecedented proportions.

If Greenspan remains in power he may well succeed with his policies, and leave it up to his successor to deal with the consequences. Greenspan wants inflation, and there's barely a better way to ask for it; except, of course, that with consumers exposed mostly to short-term debt, the Fed will be unable to fight inflation should it come without risking a depression.