Alan the Preposterous Rides Again

Brian Hicks

Updated October 12, 2006

Alan Greenspan probably never met Neville Chamberlain, but the two men certainly share a penchant for the preposterous definitive statement. For Chamberlain, of course, it was that memorable "peace for our time" quote as he stepped off the plane after being bamboozled by Hitler in Munich in 1938. And for Mr. Greenspan it was a gem that he delivered earlier this week.


Talking about the housing bubble, the former Fed chairman-one of the people who shares the blame for this debacle-said "I think the worst of this may now be over."

When I heard this, I practically fell out of my chair.

But his rose-colored glasses continued to work their dissembling magic as the maestro went on.

Speaking before a private Canadian audience, he pushed the rhetoric to preposterous new heights when he said, "I don't think that the boom came from a one-percent Fed Funds rate or from the Fed's easing. It came from the collapse of the Berlin Wall."

Now, to be fair, he did go on to explain that the fall of communism unleashed "billions of cheap laborers on the scene," creating a disinflationary environment that he says lowered inflation risk premiums.

But to tie those circumstances to the bubble in housing is specious, to say the least.

C'mon on now, the Berlin Wall coming down caused the bubble? I don't think so.

Taken together, his statements allowed the former Fed Chairman to indulge in an awkward revisionism.

According to Alan, not only is the bubble over but the truth is that he had nothing to do with it the first place!

Not surprisingly, these comments made for big news, especially on CNBC. There, the talk was optimistic, as one commentator after another parroted the former chairman by saying that "the bottom" in housing has been reached.

But this Greenspan inspired mania didn't end there.

Just the next day, analysts across Wall Street pushed the idea even further when they issued a flurry of "buy" ratings on one home builder after another.

But while the words of the former Fed chairman temporarily boosted the housing bulls, Greenspan's musings were in direct contradiction to the man who replaced him-Ben Bernanke.

In fact, just last week the new Fed chairman had this to say about housing:

"The US housing market is undergoing a substantial correction . . . Weaker housing likely will shave about one percentage point from gross domestic product growth in the second half of 2006. […] How far will this correction go? It is very difficult to tell, is the honest answer."

All of which, naturally, raises this question: Who's right? Alan or Ben?

The answer can be found in a departmental email that went out to all K. Hovnanian employees. It was written by none other than Ara K. Hovnanian himself-a guy who knows a thing or two about housing.

After all, Hovnanian is one of the biggest builders in the country.

The memo was sent out just last Tuesday, and it was enlightening, to say the least.

I've included parts of it in its original form, with my own emphases provided in bold:

Sent: Tuesday, October 03, 2006 10:02 AM
To: DL HOV Associates
Importance: High


MEMORANDUM TO: All Associates
FROM: Ara K. Hovnanian
DATE: October 3, 2006

Fellow Associates,


A few months ago I wrote to you about the changing market conditions in our industry and our concerns about how long the downturn in homebuilding may last. Since that time, the market has slowed further still, representing one of the steepest declines in new home sales in our memory. Most of our markets have been affected, some severely. At this point, we are preparing for a long period of slower sales, at least through 2007 and perhaps beyond.

What does this mean for you and for our Company? These new market conditions have affected us in many ways and will continue to affect us in the months ahead. In the area of land acquisition we have been re-evaluating our current land positions and the contracts for new land in the light of these new conditions. Many of those contracts no longer make good financial sense when you factor in lower prices and a slower sales pace. In cases where we have been unable to renegotiate these contracts with more favorable terms, we are canceling them, at times forfeiting our deposit monies.

We have also had to make adjustments to our pricing in order to make sales, either through added features, free options, waived premiums or outright base price reductions. In a market where our competitors are making dramatic pricing concessions, we must make similar adjustments in order to remain competitive. Obviously, this has a significant impact on our profits on those homes that we sell at a discount.

The most difficult adjustment we have had to make to the changing market is in the area of staffing. In many locations, including corporate headquarters, we have been forced to face the fact that we no longer have enough work for all of our Associates. We were hoping that normal attrition and a reduction in new hires would prevent us from needing to take further action. Those steps helped, but did not solve the problem of having too little work for our entire team. As a result, we have had to make staff reductions.

We consider this action to be a last resort, but business realities demand action in order for our Company to remain healthy and to maximize our performance in a difficult market environment. We know that this causes pain not only for the families of displaced Associates, but for our remaining Associates as well. In all cases, we are treating our displaced Associates fairly and with dignity. We are providing severance and outplacement services where they are available. There may need to be more adjustments if the market continues to slow. We will make those decisions with great care and sensitivity and we will try to keep you well informed of any changes.

Needless to say, this is not the type of memo that gets written as markets bottom. It tells the story of what the company believes about its future. At the moment it tells the story of a company that is battening down the hatches.

And somehow I just can't believe that Mr. Hovnanian would agree with Mr. Greenspan.

In fact, I think he would find Greenspan's take on things to be preposterous.

Mr. Greenspan, it seems, is wrong again.

But then again he's not that much different than Chamberlain. Who, as you may recall finished his "peace for our time" speech with this gem-"Go home and get a nice quiet sleep."

Poland, of course, was overrun one year later, plunging the world into war.

It wasn't over then and it isn't over now.

Sweet dreams  Mr. Greenspan.

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