Wharton School finance professor Jeremy J. Siegel says that during the last decade home prices rose in the U.S. at an unprecedented and unsustainable level, far faster than personal income or the consumer price index.
Writing in The Wall Street Journal, the University of Pennsylvania’s Siegel notes that from 2000 through 2006, national home prices soared by 88.7 percent, much more than the 17.5 gain in the consumer price index, or the tepid 1 percent rise in median household income.
“Never before have home prices jumped that far ahead of prices and incomes,” writes Siegel.
“This should have sent up red flags and cast doubts on using models that looked only at historical declines to judge future risk.”
But Wall Street professionals and individual investors ignored the signs while they were making profits buying and selling the securities.
“Congress was happy that more Americans could enjoy the American Dream of home ownership,” writes Siegel.
“Indeed, through government-sponsored enterprises such as Fannie Mae and Freddie Mac, Washington helped fuel the subprime boom.”
Siegel reckons that as home prices climbed and subprime mortgages flourished, then Fed Chairman Alan Greenspan and current Fed Chairman Ben Bernanke were the only ones influential enough to push the panic alarm and soften the oncoming economic blows.
“But they did not,” writes Siegel.
Allan Meltzer, one of the country’s foremost economic scholars, says another economic storm is brewing.
“The United States is headed toward a new financial crisis,” he writes in The Wall Street Journal.
It’s the massive monetary and fiscal stimulus that could do us in, says the Carnegie Mellon professor.
“History gives many examples of countries with high actual and expected money growth, unsustainable budget deficits, and a currency expected to depreciate,” he explains.
“Unless these countries made massive policy changes, they ended in crisis. We will escape only if we act forcefully and soon.”
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