Public may get caught twice if property turns into a bubble

ON WALL STREET: In the Bel Air district of Los Angeles, Mr Gary Winnick is doing a bit of home remodelling. The chairman of Global Crossing, despite his company's bankruptcy, is extending his $92 million (€105.8 million) estate at a cost of several million dollars.

That's what happens when people buy houses and have some extra credit or cash to spare. They want to spend money on them. Thus home purchases create demand for moving companies, contractors, washing machines, patio furniture, carpets, and everything from works of art to potted plants.

And therein lies a key to the surprisingly smooth emergence from recession (if it ever was in recession) of the United States economy. With mortgage rates at historic lows, people all across the US have been refinancing, getting that extra cash, and buying houses at a rate which has astonished estate agents.

Builders used to go broke in recessions. Not this time. The housing market has been remarkably buoyant. In January alone this year, nationwide sales of second-hand homes jumped 16 per cent, and, compared with a year ago, house prices are 10 per cent higher.

The rising value of houses has attracted savers looking for somewhere with a decent return for their money, rather than a volatile, scandal-ridden stock market or low-interest money markets.

NOW the bad news. With the economy recovering - this week's surge on Wall Street brought the Dow to its highest levels for eight months - Fed chairman Mr Alan Greenspan will have to start raising interest rates all over again, reversing the historic 11 consecutive cuts he made in 13 months.

It won't come anytime soon because inflation is under tight control but, when it does, it will start to cut the supply of cheap financing and attract money away from property.

Some analysts worry that this could mean the US housing market will become another bubble, like the dot.coms, and that people will be caught out twice making the same mistake, or as Businessweek put it: "Fool me once, shame on you; fool me twice, shame on me."

We may have been fooled once already over the recession-that-never-was. Officials at the US Treasury and the White House have this week been questioning openly if the downturn actually constituted a recession at all. "There may not even have been one," said Mr Randall Quarles, assistant Treasury secretary, on Monday.

It could be months before we have the definitive answer from the official arbiter of business cycles, the National Bureau of Economic Research, which declared in November that a recession began in March, using indicators such as employment, income and industrial production, rather than growth. It says it will ruminate for several more months before finally deciding where we are.

The rest of us define a recession as two consecutive quarters of negative growth but there was only one in the US, the July-September period of 2001, so there was no recession in most people's book.

This is a nice present for Mr Greenspan, who this week celebrates his 76th birthday. It makes up for the cash and trophy he honourably turned down - the Enron Prize for Distinguished Public Service - just six days before the Houston energy trader went bust.

THE Fed chairman, who significantly never once in the last year said that the US was in recession, has suffered some harsh criticism for the downturn. The paragon of economic wisdom was faulted, especially for not raising interest rates sooner in the late 1990s to prevent the tech stocks soaring into the stratosphere, only to crash to earth. He was also criticised for reversing himself and giving rather craven support to tax cuts when President George W Bush came to office.

More recently, Mr Greenspan has been receiving accolades for propping up the US consumer in the face of adversity. Everyone agrees that it was the credit card-wielding, shop-till-you-drop consumer who bought houses, cars, patio furniture, etc, etc as if there was no tomorrow, and kept the great economic machine going.

To see how it works in the most blatant way, go along to Bel Air and have a look at what is going on at Mr Winnick's home, the grandly-named Casa Encantada. Trucks and delivery vans roll up as he busily renovates his 15 bedrooms, 11 living rooms and 17 bathrooms, spending $15 million.

Pity about the 5,000 Global Crossing employees who have been offered redundancy pay to leave the shattered company, and the many thousands of shareholders who lost out with Global Crossing's crash - unlike Mr Winnick and other stockholders including former President George Bush who cashed in their Global Crossing shares when the going was good.

That's what's called the down side, and that's another story.