by Calculated Risk on 7/25/2005 10:52:00 PM

DiMartino disagrees with Greenspan on the housing bubble:

There's a good chance the housing bubble carries severe macroeconomic implications, a point Alan Greenspan disputed in his congressional testimony last week.

If prices fall, he said, "they likely would be accompanied by some economic stress, though the macroeconomic implications need not be substantial."

Let's start with some factoids from Merrill Lynch:

•Real estate accounts for 70 percent of the rise in household net worth since 2001.

•Forty percent of private-sector jobs created since then are housing-related.

•Consumer spending and residential construction have accounted for 90 percent of U.S. economic growth.

I tried to quantify the impact of the housing bust on the economy on Angry Bear. DiMartino does a better job:

The inevitable pullback in construction speaks directly to housing's risks. A similar 40 percent decline in construction to that of the 1981-82 recession implies a decline of 2 percentage points in GDP.

And then there's the wealth effect. The housing bubble has added $5 trillion to household net worth, equating to about $70,000 for a family of four.

"The large wealth effect associated with the housing bubble, which has spurred a consumption boom in the last few years, will go into reverse as housing prices plummet," Mr. Baker predicted.

This dent in consumption would whack an additional 1.6 to 2.5 percentage points off GDP growth. Totaled out, that GDP retreat about equals current GDP growth.

Maybe I'm being obtuse, but a recession is about as macro as you can get, economically speaking.

Maybe the best thing to do is respectfully agree to disagree with Mr. Greenspan and let time render its own decision.