Housing's Trickle-Down Effects

Alan Greenspan understood the tight connection of housing to construction and to the balance of the economy. He had counted on these connections to restore economic growth. As luck would have it, these connections remain intact when housing goes south. Ben Bernanke by now was in charge of the central bank. On February 14, 2009, Bernanke told the Senate Banking Committee that the serious housing slump and a credit crisis triggered by rising defaults in subprime mortgages had greatly strained the economy. “The outlook for the economy has worsened in recent months and the downside risks of growth have increased,” Bernanke told the committee. “To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, had deteriorated significantly over the past two years or so.” He still did not predict a full-blown recession, only sluggish growth. Some economists said that he had underestimated the coming calamity. The Dow Jones Industrials fell 175 points the next day, as if to highlight Bernanke's remarks.