Quote of note:

"Short of a significant fall in overall household income or in home prices, debt servicing is unlikely to become destabilizing," Greenspan said.

Greenspan said that it would take "a large, and historically most unusual" decline in home prices to wipe out the equity that Americans have in their homes. He said about three-fourths of all mortgages are taken out by buyers who put up a 20 percent downpayment, which would be enough to cover even a very significant drop in home prices.

The problem is there are so many people who've already taken out second mortgages, who have (in the words of the commercials) "cashed out their equity," which sounds ever so much like you'll never have to pay it back. Then there's all the reverse mortgages that allow you to borrow 115 or so percent of your equity, which actually puts you in the hole.

These are the very transactions Greenspan lauded as the buffer that allowed folks to get through the nation's economic miasma in comfort.

Greenspan: High Household Debt Not Serious Threat

By Martin Crutsinger
AP Economics Writer
Tuesday, October 19, 2004; 10:43 AM

The record level of debt being carried by American households and soaring home prices do not appear to represent serious threats to the U.S. economy, Federal Reserve Chairman Alan Greenspan said Tuesday.

Greenspan said that high levels of personal bankruptcies were a concern because they indicated "pockets of distress" among American households. But he said the vast majority of U.S. consumers "appear able to calibrate their borrowing and spending to minimize financial difficulties."