The Price of Greenspan's Success

Although there are currently pockets of insanity in housing, Lonski referred to even more excessive speculation and overbuilding, akin to what occurred in the 1980s. That cycle ended, in part, because of the stock market crash in 1987. Notably, the Fed today is pursuing policies consistent with a weaker dollar, a major trigger of the '87 crash. Skeptics worry that weakness in the greenback will turn into a rout, prompting the Fed to tighten monetary policy. Higher rates will curtail economic growth and have devastating consequences for both housing and Treasuries.

"Rates will turn fast and end refinancing activity," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago. "It can be vicious when [an easing cycle] comes to an end."

Wesbury recalled the bond market's heavy losses in 1994, after the Fed abruptly ended an easing campaign and started tightening. The bond market is "in the same can of worms today," he said, suggesting the Fed is "too easy" today and "you can't play that game forever."

Should rates rise and/or home prices fall dramatically, for whatever reason, homeowners will be unable to extract equity via refinancings. Also, many homeowners may find themselves "upside down" on their mortgages, meaning they'll owe more than their homes are worth and delinquencies may rise. Given commercial banks' exposure to mortgage debt -- of all stripes -- any trouble in the housing sector will have serious repercussions for the financial sector; ominously, mortgage foreclosures hit a 30-year high in the fourth quarter, as reported previously.

Furthermore, no matter how low mortgage rates fall, it's going to be hard for most Americans to make their mortgage payments if they're out of work.

Laboring Over Jobs

Labor markets will be the center of attention Friday. The May jobs report is expected to show nonfarm payrolls falling by 30,000, while the unemployment rate rises to 6.1% from 6%, according to Briefing.com. Greenspan's description of the labor market as "exceptionally weak" on Tuesday provides ample cover for the Fed to ease again at its policy meeting on June 24-25, if not sooner, if the jobs report proves much weaker than expected (Payrolls fell by a less-than-feared 17,000 and the unemployment rate was 6.1%, as expected. Stocks rallied early Friday in reaction and Treasury prices fell as expectations for a 50-basis point Fed ease this month diminshed.).