The Price of Greenspan's Success

With debt being the drug and the Fed being the pusher, Paul Kasriel, chief U.S. economist at Northern Trust, compared American households and business to heroin addicts. "If you give a heroin addict a fix, he'll function better in the short run then if he went cold turkey," Kasriel said. "But if you keep giving him fixes, ultimately he's going to die."

On the corporate side, $70 billion of debt was issued in May, while an additional $14.1 billion was raised through convertible bond offerings, according to Morgan Stanley. Total outstanding credit market debt totaled $32 trillion at the end of 2002 vs. $13 trillion in 1990, according to Doug Noland, financial markets strategist at David Tice & Associates in Dallas.

In the household sector, refinancing activity has lowered borrowing costs and helped Americans replace "bad debt" with good. Still, households' total liabilities relative to total assets were a record 18.3% in the fourth quarter and personal bankruptcies were at an all-time high as of March 31, Kasriel noted.

To his many critics, it is as if Greenspan has facilitated a migration from one bubble in equities to another in housing, with a Treasury bubble thrown in for good measure. The equity bubble, of course, ended with one of the worst bear markets in American history. Some foresee the risk of repeats in housing and fixed income, with perhaps even more devastating effects to the real economy.

"Indeed, never has a financial system been more vulnerable to higher interest rates, emanating from the highly over-borrowed consumer and corporate sectors, as well as the egregiously exposed financial and 'speculator' arenas," Noland recently wrote. "And there is absolutely no escape."

On a less draconian note, Lonski fears ever-lower mortgage rates could trigger a true housing bubble, much as the Fed's aggressive easing in 1998 spurred wild speculation in equities.