Oh how wonderful it is not to feel so lonely. First it was Alan Greenspan who started to get interesting on the US social security situation and the state of the refi market. Now it's Ken Rogoff, who once more is confirming that under his stewardship the World Economic Outlook is going to be a 'must' read. This is soooo different from what was coming out ten years ago. If only the OECD could take a leaf from their book - the numbers crunched out may look the same (since the models are more or less similar), but the analysis is light years behind. What makes a good economist is not the capacity to think like a computer, but the capacity to exercise judgement. Looking at the working papers the OECD have some interesting economists on board, so maybe it's time to change the Chief Economist. Incidentally, two more points: I am also not clear that the US situation constitutes a housing bubble. The UK and Spain clearly do. I am merely worried about what will be the consequences of a slowdown in housing in the US for consumer spending, if this happens without an acceleration in capital expenditure. Then we would see the full impact of the March 2000 NASDAQ burst, and this looks like it may now be happening. (Of course one of the difficulties in identifying a bubble may well reside in a lack of agreement about what really constitutes one, even after the event). Which brings me to the second point: the difference between an economist and an index can be seen in the 15% probability assigned to the double dip. I would give it a far higher probability than that, so to all appearances would Stephen Roach and Brad Delong. By their friends shall you know them.
Housing booms such as those in the US and the UK over the past decade are frequently followed by crashes, the International Monetary Fund warns in a forthcoming biannual report on the state of the international economy. Selectively released chapters from the IMF's World Economic Outlook, due out next Wednesday, also warn that excessive corporate debt continues to hold back recovery in the eurozone and the US. But the report also said current debt levels implied only around a 15 per cent chance of another US recession. Ken Rogoff, the fund's chief economist, warned that the long boom in house prices - up 28 per cent in the US since 1996, and 70 per cent in the UK since 1994, adjusted for inflation - put them in danger territory."Forty per cent of all housing booms are followed by busts, with housing price drops that typically average 25-30 per cent," Mr Rogoff said. House prices were more susceptible than stock prices to a bust after a boom, and big economic contractions generally accompanied a crashing housing market, the IMF found.
The IMF also stressed that central banks should continue to monitor house prices as part of their wider assessment of inflationary pressures, rather than target asset prices directly.The new report declined to say whether the US housing market had reached bubble territory. But David Robinson, Mr Rogoff's deputy, said: "It is something we need to keep our eye very much on because it is historically high." A sanguine US Federal Reserve has largely insisted that the size of the US market and the ease of construction make a US housing bubble unlikely. But Bank of England policymakers have expressed more concern at the rapid rise in UK house prices. Elsewhere in its economic outlook, the IMF said that the huge build-up of corporate debt, some of which remained in spite of companies' attempts to deleverage, had held back economic recovery.Mr Rogoff said excessive debt had cut eurozone growth by 2.5-3 percentage points last year, and US growth by up to 1 percentage point. He said it would continue to drag on the recovery this year. But an index that predicted recessions based on corporate leverage and macroeconomic conditions suggested only a 15 per cent chance of a double dip, the IMF said.
Source: Financial Times
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