GREENSPAN: Swings in stocks values, homes values present challenges to policy-makers

Friday, August 31st 2001, 12:00 am
By: News On 6

WASHINGTON (AP) _ Federal Reserve Chairman Alan Greenspan said Friday that policy-makers are being challenged by dramatic gains and losses in the stock market and less volatile movements in home prices.

The challenge, he said, is for policy-makers to try to better understand how gains or losses on stock investments and in home values affect consumers' willingness to spend.

Consumer spending accounts for two-thirds of all economic activity and has been a main force propping up the struggling economy. The yearlong economic slowdown has led to a slide in the stock market. But home values, for the most part, have gone up.

``There can be little doubt that sizable swings in the market values of business and household assets have created important challenges for policy-makers,'' Greenspan said in a speech delivered at the Fed's annual retreat in Wyoming's Grand Tetons. The text was distributed in Washington.

To assess how gains or losses from different types of assets _ a stock versus a home _ affects consumer spending and thus the overall economy will require more analysis by policy-makers, Greenspan said.

``To answer these questions, we need far more information than we currently possess about the nature and the sources of capital gains and the interaction of these gains with credit markets and consumer behavior,'' he said.

Over the past year and a half, Greenspan said home values have appreciated, while stock values have contracted significantly.

``In such circumstances, differences in the propensities to consume out of the capital gains and losses on different types of assets could have significant implications for aggregate demand,'' he said.

He said the Fed is in the process of studying the matter to try and develop more detailed information.

In general, for every $1 increase consumers' wealth, consumer spending is raised by three to five cents, he said. But when a home is sold, with the resulting cash from the capital gains, consumers tend to spend more _ 10 cents to 15 cents of that dollar.

Greenspan, in his speech, did not give his outlook for the overall economy nor the future course of interest rate policy.

The Fed has slashed interest rates seven times this year in an effort to avert the first recession in the United States in 11 years.

Greenspan also said that the government's calculation of the nation's personal savings rate _ savings as a percentage of after-tax income _ gives an incomplete picture of household finances.

That's because the savings rate measures only the amount of money being put aside for savings. It doesn't represent a calculation of personal wealth, which would involve calculating the gains or losses households have realized on their savings from such things as investment and higher real estate values for their homes.

Many economists have complained that the savings rate has underestimated personal savings, particularly in recent years when the stock market was booming.