Ip Blames Greenspan for Lack of Regulation

The only reason that the anonymous Economist blog post 'He Had the Power' is believed to be authored by Greg Ip (formerly of the Wall Street Journal) is because Felix Salmon says it is, and that's good enough for me.

The piece is in reference to the latest edition of former Fed Chairman Alan Greenspan's lame defense of his long tenure at the central bank and its aftermath, a WSJ op-ed that was discussed here last week under the heading Alan Greenspan still doesn't have a clue.

For someone who was once referred to as a "Fed channeler", since his access to board members was purportedly unrivaled, it is something of a damning condemnation:

In the earlier part of this decade Mr Greenspan asserted on a number of occasions that while America might have local housing bubbles, there was no national housing bubble. Yet he now asserts there was a global housing bubble. It has always puzzled me how he could go from seeing local bubbles to a global bubble without at some point diagnosing a national bubble. By failing to diagnose a national housing bubble until it was already well inflated, the Fed under Mr Greenspan escaped the obligation to do anything about it.

The nature of long-term interest rates, their role in the housing bubble, and whether or not the Fed was really "powerless" to control them is then tackled, the idea of short-term rates being hiked as high as 8 to 10 percent, all but certainly inducing a recession ala Paul Volcker in the early 1980s, floated as one approach to cooling home prices a few years back.

Perhaps if the 2003-2004 era opportunity had been seized to reinstate home prices or mortgage payments (then rising at 6-8-10 percent a year) back into the the consumer price index in lieu of the nefarious "owners' equivalent rent" (which was helping to signal "deflation"), it would have been much easier to raise rates that high and we'd all be much better off right about now as a result.

Oh well, that's why they write history books and revise economic methodologies.

According to Mr. Ip, however, the much more important failing of the Fed chief, a man who was once revered as the second most powerful man in the world, was his light-touch when it came to regulation and it is here where the most fault is found.

Had Mr Greenspan and his colleagues concluded housing prices were too high and there was value in taming them, they could have used regulatory tools instead of monetary policy. They could have insisted on a margin requirement for home purchases—no one could put down less than 20% unless they obtained mortgage insurance. (At the peak of the bubble, the widespread use of second liens made 100% loan-to-value mortgages without insurance commonplace.) This would have been politically difficult since it would have deprived lots of people the opportunity to own a home, in violation of America’s credo. It would have also contradicted Mr Greenspan’s own deregulatory impulses. He resisted raising margin requirements on stocks in the 1990s in part out of a conviction that only small investors would be affected; big sophisticated players would find a way around them.

There are many other regulatory steps that could have been taken over banks (requiring them to hold capital against off-balance sheet vehicles) and mortgage originators (requiring all of them to document income and to escrow insurance and taxes, for instance) that, while not stopping the bubble, would have mitigated the consequences. It’s worth noting that many of the countries that have had housing bubbles, like Australia and Spain, have not had banking crises in part because their regulatory regimes did not permit the same degree of leverage.

Unlike the bubble/recession trade-off, this trade-off may have been acceptable even if the current crisis had never happened. It is hard to believe that society would have been significantly worse off if we’d limited the growth in home ownership to, say, 66% instead of 69%, by excluding people unable to make a substantial financial commitment.

These are strong words from someone who once cast a much less critical eye.

Comments

[Football Geek:]

Greenspan was asleep at the wheel while this mess was building, and now he says that it's not his fault.
C'mon .... we are not stupid people !!
The truth is starting to come out about how
responsible he really was. He should just shut up, and
stop blaming others for his own incompetence

Mar 16 08:45 PM

[ariesl:]

Many of the problems we've experienced actually started under Reagan and Bush I. They began the deregulation of financial companies and removal of walls separating Wall Street from Banks and Insurance companies. The icing on Wall Street's cake was really heaped on by the administration of George the second. We've experienced what happens when an almost religious effort at DEREGULATION, to the extreme of not enforcing existing regulations, gives greedy people a green light to abuse the system, and consequently, the economy and the citizens.

Many have written about the FED and it's previous chairman. However, I don't think the point has been as made that the real pupose of the FED IS TO CREATE INFLATION, which is a hidden tax on all of us. Inflation penalizes those who would save and rewards those who borrow and pay back with cheaper devalued dollars later. The other purpose of the FED is to feed the Boom and Bust Cycle. Remember the low interest rates of the late 90's and the easy money policy that led the so called "dot com" boom and bust? Why bust?... because the FED very suddenly cut off the money supply and raised rates faster than the economy could adjust. Result? An entire generation of stock market, IRA, and 401-k investors had their life savings decimated. How dare they try to move from the Middle Class into the ranks of the moderately wealthy. The same goes for all the uppity entrepeneurs of that period. Of course the very wealthy, who know the game, got out early so they could reinvest at the bottom of the cycle.

Next, many people were lured into the real estate boom and bust. Encouraged by the FED's excessively low rates of 2003-2006 and almost total lack of regulation, or even serious effort at enforcing existing regulations. AGAIN, The FED popped the bubbled it inflated. This time millions of home buyers were financially crushed. Their crime?... nothing more wrong than to buy a house at the wrong time or be taken in by preditory Mortgage Brokers and Bankers who used bogus appraisals to justify the inflated housing prices of the time. The real criminals are free and have kept their illgotten gains.
Now, many of those who have paid their bills their whole lives and were proud of excellent credit scores, are finding themselves owing up to100 or 200 thousand dollars more than their house is currently worth, even with a 20% down payment! Today many wealthy investors are coming to South Florida to scoop up foreclosed houses at 60% to 70% off the inflated 2006 prices. If the FED's goal is to set up massive tranfers of wealth away from the Middle Classes, then it is succeding superbly. Notice how they always seem to be tardy at stopping the downturns, so the cycles are amplified to the down side squeezing any stalwart or responsible types determined to hang on.
BTW, the unfortunatesand dead beats who took out the subprime loans were as often as not lured into houses they could not afford by the same unscrupulous lenders I mentioned before. Once they were foreclosed on, the Banks began dumping their houses on the market, thus driving prices down. That made more homeowners give up on their loans, get foreclosed on, and so on like a monstrous real estate snowball rolling down a very long and painful slope. The next wave of foreclosures will be the resonsible folks rolled over by the snowball. How does one justify paying back hundreds of thousands of dollars more than the house is worth to the very banks that were complicit in the creation of the problem? It will be nearly impossible for someone at the front of the baby boomer pack to recover from such a financial disaster. Especially if their credit has been destroyed.
Of course, once again there is a massive transfer of wealth away from the Middle Classes, insuring that they never are allowed to amass true wealth. Once again, the wealthiest portion of the population keeps getting richer! It's part of the plan! Remember that when you hear people whine about Obama's tax plan being a "redistribution of wealth". That's a sick joke and the majority of Americans are the butt of the joke.

If you would like to learn more about the FED and it's creation and practice, copy and paste this link into your browser,
seekingalpha.com/artic...
OR a longer and even more eye opening article at this link
philologos.org/bpr/fil...

Mar 17 04:12 AM

[john s. gordon:]

it's not 100% greenspan's fault, the SEC was asleep @ the switch too.
> jack

Mar 17 08:08 AM

[change is t...:]

There are limits to what monetary policy can do. There are limits to what regulation can do. We are in a new place of globalization of physical goods and capital markets. Our banks' profit models and balance sheets are broken. Blaming yesterday's Fed chairman neither increases the limits of monetary policy nor US regulation. What got us here is a breach of trust in people (read bankers and insurance companies) who made their money on the spread in borrowing from the government.

These "titans" of industry were unethical and reckless if not immoral and illegal. The finance industry "outsmarted" the regulators and then discovered they have screwed themselves (and us taxpayers too). That recklessness is what made where we are now a moral hazard problem. Blaming Greenspan is like blaming the police for criminal activity. If Felix Salmon or Greg Ip needs to blame something, they should blame avarice. We either need new human beings (ha ha) or a new business model for banks.

Mar 17 12:51 PM

[Left Coast ...:]

How do I say this nicely--- you are wrong. Go back to 2004, when most of the sub-prime started-- who were the biggest problem institutions? -- mortgage brokers and Wall Street firms Bear, Merrill and Lehman-- none of which the Fed regulated. Nor did the Fed regulate FNMA nor FHLMC. Nor does the Fed regulate the "rating agencies" who seriously dropped the ball. Nor did the Fed regulate AIG.

If you're going to impugn someone, at least get you facts straight.

Mar 17 02:36 PM

[theobannion:]

When Greenspan was first appointed, I told my son over dinner in a Fort Lee, NJ restaurant that he (Greenspan, not my son) was a political animal and that, between him and Reagan, they would one day bankrupt the country. I didn't think at the time that together they might bankrupt the world.

You live and you learn. Stay tuned: this is far from over. But when it ends - and there will be more waves ahead of us - the final tsunami of egoism and expediency will capsize us.

Can anyone really believe that a man of Greenspan's intelligence & education was "clueless"? Only an idiot couldn't know that he was blowing a gigantic bubble.

SOB.

Mar 19 10:15 AM