Greenspan Yet Again Blames Others for Housing Bubble

Former Federal Reserve Chairman, Alan Greenspan, published an editorial in the Wall Street Journal yesterday that absolves himself of any wrong-doing in the housing bubble and its subsequent destructive aftermath. Latching onto a weak argument that circa 2002 long-term mortgage and short-term federal funds rates had statistically diverged in correlation, he suggests that the overcapitalization of housing resulting from cheap credit was not his fault. Many critics have pointed the finger at Greenspan for setting short-term rates too low for too long. Access to cheap credit, according to critics, sparked “irrational exuberance” in the housing market, flooding the sector with unprecedented capital and driving prices to ridiculous levels.

Rather, Greenspan blames global trade in boosting foreign savings rates and leaving the U.S. with large current account imbalances that were subsidized by our trading partners. The current account cash flows went almost exclusively into housing, driving long-term mortgage rates to unprecedented lows and encouraging speculation.

Hilariously, in his editorial Greenspan cites famous economist Milton Friedman as saying that during Greenspan’s tenure from 1985-2005, “There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind.”

Friedman did not live to see the aftermath of Greenspan’s policies. Short-term federal funds and long-term mortgage rates did diverge in correlation, but they did so precisely because of Fed and other governmental policies. The structural distortions in our economy leading to sustained trade imbalances were caused by irresponsible monetary and fiscal policies. Congress legislated the creation of the secondary mortgage market, mandated that it funnel capital to subprime borrowers, and taxed away America’s industrial base. Couple this with a sustained period of negative real interest rates orchestrated by Greenspan, and the U.S. economy grew ridiculously distorted over time, channeling the world’s savings towards our consumption, leaving the country bereft of productive capacity. Housing is not productive, but consumptive.

Global trade is not the problem. Current account and trade deficits, of themselves, are not the problem. Artificial interest rate manipulation, social engineering legislation that drives consumption over production, and inflationary monetary policy that drives perpetual inflation and currency debasement are the issues.

Mr. Greenspan accuses his detractors of rewriting history, but that is precisely what he is attempting to do.

Comments

[MGA_1:]

I'd say peg the us dollar to a particular value in gold and let interest rates float around... hopefully might avoid this type of excess in the future.
BUT, there was a complete dismantling of lending standards in the early part of this decade.

Mar 12 09:46 AM

[auto44:]

The main culprits were the politicians who forced the banks into selling subprime. Can't blame them for trying to unload them on the rest of the world. Now they are trying to force the banks to do it all over again insisting they loan money from tarp etc. to unworthy borrowers. They have been yelling about affordable housing since creation and now they think the fix is to get housing prices up. Housing construction should not be the driver of our economy. Industrial production should drive the economy, affordable housing and consumer spending at Christmas should be the result of profits in other endevers not the driver of our economy. Printing fiat currency will only take us so far when we are not selling to other nations around the world and our work force here a re mainly paper shufflers.

Mar 12 09:50 AM

[sockittome:]

Check this out - from February '04. Still think Greenspan is blameless??

Federal Reserve Chairman Alan Greenspan said Monday that Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.

In a standing-room-only speech to the Credit Union National Association meeting here, Greenspan also said U.S. household finances appeared generally sound, despite rising debt levels and bankruptcy filings. Low interest rates and surging home prices have given consumers flexibility to manage debt, he said.

"Overall, the household sector seems to be in good shape," Greenspan said.

Mar 12 10:37 AM

[raytayzmd:]

...you did well until:

"The structural distortions in our economy leading to sustained trade imbalances were caused by irresponsible monetary and fiscal policies."

...well, yes...but lest anyone forget the economy has been chugging along pretty well since about 1982...and, presumably, that was a result -- at least partly -- of the same policies...people who failed to save up some dough doing the good times have only themselves to blame for any misery they incur during the tough times...and that is regardless who is the blame for the current situation...NO one can predict the future but ANYONE can prepare for it.

Mar 12 10:39 AM

[joes:]

Greenspan and Friedman were wrong on everything, seeing Obama run away from that Ayn Randian nonsense that we had to put up for decades provides some hope. Obama is left with closing a gap created by ignorant and confident people who only cared about the rich.

Mar 12 11:04 AM

[alphadominance:]

It was Greenspan's hubris to think that he could do away with the business cycle. He kept his foot on the gas preventing necessary corrections and inflating bubbles in all asset classes that have unleashed unprecedented destruction of wealth. We have not just a correction, but the overcorrection of all time as a result.

Mar 12 11:18 AM

[Dr.Jackpot:]

At age 78 I am absolute irrevocable living proof that Greenspan's low (no) interest rate policy was and still is the greatest legal theft of all time. I entered my retirement with my life savings drawing what for years and years was considered reasonable interest returns on T bill, CD's, etc. As my retirement income steadily declined towards zero, low (no) interest rates fostered overspending by the young on all manner of purchases thereby driving up prices of homes, cars, food and about everything else. Banks had a field day on fees. Huge bonuses were paid to Wall Street clerks. It was if the Fed was saying to me----"You better buy stocks or we're gonna starve you out". And they could last longer than me. Who would complain? I wrote a letter to the Federal Reserve Board and received a reply that they realized my predicament but it "was for the good of the country". Since nobody has any sympathy for anyone who actually saved and 'has anything' my complaints have always fallen on deaf ears. Well, now the results are out and people are looking for the culprit. I think he's been found.

Mar 12 11:32 AM

[Duude:]

Greenspan does misrepresent his responsibilities. Consider the current environment. The economy is cratering. Is Bernanke just pointing to graphs to show I've lowered rates but the economy is still cratering. Sorry I did my job. No, you throw the kitchen sink at it. That isn't necessarily a thumbs up for everything Bernanke has done, but it does point to the many more tools available to the Fed than Greenspan was apparently aware. Greenspan had also been warned of sub-prime adjustable rate loans but didn't believe it needed any regulation. More than interest rates, that's his smoking gun. Yet still, there is a lot of blame to go around that wasn't Greenspan. Mortgage originators practically colluded with Fannie and Freddie in building up this mountain of crap enriching both the mortgage brokers and companies and Fannie and Freddie's executive management before they retired in filthy rich luxurious style. The homeowners that signed these mortgage contracts largely knew the way the mortgage worked but were greedy for a fast and upward moving real estate market which they thought would always bail them out. The credit agencies that regularly rubber stamped AAA to every tranche of MBS. And lastly, the party goers that came with the gasoline, the bankers who leveraged their assets exponentially so as to greatly increase their own earnings while stupidly believing their quants knew what they were doing.

Mar 12 11:51 AM

[BerkeleyBob:]

I am no fan of Alan Greenspan. In tepid defense of Freddie and Fannie, there remains a strong policy argument favoring the creation of a secondary market for mortgages. The CRA was a bone in the throat of lenders, who claimed that Fannie and Freddie provided unfair competition because of their quasi-governmental status and access to low cost capital. Congress was responsible for pushing some sub-prime loans or reduction in underwriting standards, but neither entity was a prime mover in alt-A, ARM (Greenspan thought they were great but in fact represent an enormous shifting of the burden of interest rate increases from lenders to homeowners)or bad underwriting and appraisal practices, all of which were rampant in the private sector. The rating agencies have a great deal of responsibility for endorsing the toxic packaged loans, again almost entirely from investment banks (the distinction was blurred by repeal of Glass-Steagel). In sum, Mr. Greenspan was self-deluded and did a great deal of harm. He may attempt to spin his story, but can not be believed.

Mar 12 12:45 PM

[Fred Voetsch:]

Yes, Greenspan was a huge part of the problem but as anyone who studies history and knows about generational dynamics realizes, Greenspan did not cause the problem, he was just a cog in a machine that was destined to blow up a very large bubble and eventually see it burst.

Mar 12 01:20 PM

[MisterVA:]

Mr. Greenspan should just keep his mouth closed at this point in time. His selective memory is appalling. He will not be able to re-write his legacy. And he certainly will not be able to escape his role in the economic morass we now are experiencing. Is he the only one who bears responsibility here? Of course not. But he is far from blameless and the more he professes innocence the more blame he is likely to have assigned to him.

Mar 12 01:25 PM

[PROXIMO:]

Greenspan's efforts at salvaging his reputation are embarrassing.

Mar 12 01:36 PM

[Tony Daltorio:]

Greenspan shows no shame. It wasn't the fault of Greenspan's Federal Reserve, it was the fault of "excess global savings". It was the fault of all those "crafty" foreigners like the Chinese who were prudent and saved their money. Incredible!

Mar 12 02:09 PM

[American in...:]

The author needs to get over his crude monetarism. Some Euro zone countries experienced big real estate bubbles ando others did not.

Yet all these countries shared a common monetary policy (European Central Bank).

So how do you explain the different real estate behavior in terms of a common monetary policy?

It doesn't make sense. Spain, Ireland, and the UK experienced massive bubbles. Not sure Germany or the Netherlands. France experienced a medium size bubble.

Same monetary policy. Dramatically different outcomes.

Mar 12 06:29 PM

[Bundee:]

Years after the Great Depression, the public blamed Herbert Hoover for either causing it or not doing enough to end it.
While this may have been an unfair charge against Hoover, the court of public opinion turned strongly against him and remained so for may years and decades afterward.

The court of public opinion has turned very, very strongly against Greenspan, and with more and more evidence of his bad actions or inactions coming to light, the Greenspan legacy will be as tainted and condemned as the Hoover legacy was, and there is nothing that Alan Greenspan can say or do to save his reputation or his legacy.

Mar 12 07:11 PM

[sunny12945:]

'we all enjoyed the bubble before it burst'

If one was smart enough to see bubble, you should have profited from it, by getting of the gravy train, before it crashed!

Mar 12 10:04 PM

[Mr. Ed, Jr.:]

Alan "Bubbles" Greenspan is everywhere these days, dashing from media to media in a frantic effort to save his legacy.

And Barney Frank said he will hold hearings to find out who is responsible for this mess.

And certain nitwits in Wall Street/Banking have to be warned not to pay themselves bonuses from the taxpayer bailout money.

Is this a great country, or what?

Mar 12 11:17 PM

[silverfox:]

Well you can blame Greenspan for the housing or you can say should people become accountable for their actions.
We have the Banks who threw risk to the wind and give anybody a mortgage that could walk or breathe.
Then we have the buyer that in some strange twist should not have any responsability for his part in the transaction.
Lets take a close look at the Banks for creating a lending environment where nobody was refused.
And the buyer who actually thought that someone else will tell me what i can afford and their to blame when i can not afford it.
It seems crystal clear to me that the Bankers & potential buyers with big pipe dreams should all look in the mirror and do some soul searching.

Mar 14 12:08 PM

[EEB:]

I doubt that the government was the driving force behind the sale of subprime loans at places like Countrywide and other mortgage specialists. That paints a picture of corporate officers like Mozilo as saints who were forced to do bad things by the big, bad government. That seems like a fairy tale.


On Mar 12 09:50 AM auto44 wrote:

> The main culprits were the politicians who forced the banks into
> selling subprime. Can't blame them for trying to unload them on the
> rest of the world. Now they are trying to force the banks to do it
> all over again insisting they loan money from tarp etc. to unworthy
> borrowers. They have been yelling about affordable housing since
> creation and now they think the fix is to get housing prices up.
> Housing construction should not be the driver of our economy. Industrial
> production should drive the economy, affordable housing and consumer
> spending at Christmas should be the result of profits in other endevers
> not the driver of our economy. Printing fiat currency will only take
> us so far when we are not selling to other nations around the world
> and our work force here a re mainly paper shufflers.

Mar 14 01:03 PM

[backtoreality:]

kmf...greenspan should share a jail cell with madoff...first he told congress.."repeal glass-steegal"...next.... is no housing bubble"..and lastly...1929 cannot happen again because the banks/brokers have "all sorts of sophisticated financial instruments"...meaning derivatives, that don't need regulation, and will prevent another tanking of the financial markets....greespan is both a liar and a booby...like the bush who appointed him.


On Mar 12 07:56 AM kmf wrote:

> ...and how many times did Greenspan look at his numbers and declare
> that "there is not a housing bubble"?

Mar 15 08:51 PM