Dequity

By September 25, 2007Economy

Winston Churchill famously said that democracy is a terrible system of government, except for all the others. One could say the same thing about capitalism: It’s abundantly superior to other economic systems, but it’s prone to excesses. We saw it in the dot com bubble of a few years back, and now we’re seeing it in the housing bubble. It’s not that sensible people don’t see these things coming, but no one seems to know how to stop them.

In his commentary today, Bloomberg’s John Berry – reviewing Alan Greenspan’s book – says the former Fed chairman deemed it impossible to know when a rise in asset prices, be it for stocks or housing, becomes a bubble, and added that in any case the Fed cannot deflate a bubble without throwing the economy for a loop.

The housing bubble was great while it lasted. Soaring house prices made many of us equity rich. At our house, we refinanced to send our children to college and pay off cars. We were lucky; we have less equity today than a year ago, but we still owe less on our house than it is worth.

Many people aren’t so fortunate. They bought at the top of the market and now find they have shifted from equity to dequity. As a growing number of adjustable rate mortgages begin to kick in, there will be more foreclosures and personal bankruptcies. We have not yet seen the end of the housing slump. The question is – can manufacturing and exports pick up the slack and keep the economy growing?

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