The Housing Bubble: Greenspan's Wayward Son 32 comments
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When, during the invasion of Iraq, the United States Government issued its famous deck of playing cards with the 52 arch villains of the Iraqi police state, Saddam Hussein's face adorned the Ace of Spades. If the Obama Administration wanted to engage in a similar public relations campaign for the real estate crisis, the top card should be reserved for Alan Greenspan.
Yet in a speech this Tuesday before the National Association of Realtors, Sir Alan “the-bubble-blower” claimed that his low interest rate policies in the early and middle years of this decade had no effect on mortgage rates or real estate prices. As a result, he claims no responsibility for the subprime mortgage crisis. But even current Treasury Secretary Timothy Geithner, who shared interest rate policy responsibility as governor of the New York Fed during the Greenspan regime, recently admitted that overly accommodative policy helped inflate the bubble. So what does Greenspan know that everyone else doesn't?
His primary defense is that mortgage rates were a function of long-term interest rates which were simply not responding to the movement in short term rates, which he did control. While it is true that the flow of capital from foreign creditors with excess dollars did keep long rates low despite rising short rates, this “conundrum” was not the leading factor in the housing bubble. Although rates on thirty-year fixed rate mortgages are based on long-term bonds, by 2005 such loans had become an endangered species. The housing bubble was all about adjustable-rate mortgages with 1-7 year teaser rates primarily based on the Fed funds rate.
The rock bottom teaser rates, permitted by the 1% Fed funds rate, were the primary reason that many home buyers were able to qualify for mortgages they couldn't otherwise afford, and in turn, to bid up home prices to bubble levels. By pushing down the cost of short-term money, the Fed enabled homebuyers to make big bets on rising real estate prices. Without the Fed's help, few borrowers would have “qualified” for these risky mortgages and real estate prices never would have been bid up so high.
Greenspan expresses exasperation now, as he did then, that his careful nudging of interest rates higher by quarter point increments did not translate into corresponding increases in long-term rates. Unfortunately, according to Greenspan, the markets would not cooperate with his wise guidance, and to his dismay, mortgage rates fell despite his best efforts. As they say in Texas, this dog will just not hunt. If the “measured pace” of his quarter point hikes were too slow to produce the desired effect, why didn't Greenspan jack up the pressure? With interest rates far below the official inflation rate for many years during the bubble, he certainly had plenty of room to maneuver. The claim that he was unhappy results of his rate hikes, despite his having done nothing to adjust that policy, is ridiculous.
In addition to his colossal errors on interest rate policy there were many other ways Greenspan blew air into the real estate bubble. One example was what the market called the “Greenspan put.” By creating the perception in word and deed (since proven accurate) that the Fed would backstop any major market or economic declines, lenders became more comfortable making risky loans. In an often quoted 2004 speech, Greenspan went so far as to actively encourage the use of adjustable-rate mortgages and praised home equity extractions for their role in contributing to economic growth. In fact, rather than criticizing homeowners for treating their houses like ATM machines, he often praised the innovative ways in which such homeowners were “managing” their personal balance sheets. Greenspan was as much a proponent of leverage for homeowners on Main Street as he was for bankers on Wall Street.
The bottom line is that Greenspan fathered the housing bubble and now he refuses to acknowledge kinship of his wayward child. His denial of responsibility is an act of stunning bravado, and is a testament to his ability to turn even the simplest of situations into an impenetrable tangle of theories and statistics. The private sector jokers who now hold top dishonors in our pack of economic villains are easily trumped by the Maestro. The fact that Greenspan still has any credibility shows just how little understanding the general public, including Wall Street and the media, actually have about this crisis.
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“The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake.” ---Alan Greenspan
Good Lord! What a quote from a man who has left such a trail of destruction in his wake so as to leave the world economy unrecognizable from 2 years ago.
"If low rate policies lead to bubbles, then we should see one developing now.....at least in the mortgage markets...which are the long end of the spectrum."
----That's right. The government is furiously attempting to reinflate or at least somehow prop up the bubble they engineered. I can see you know nothing of Austrian economics and you've never read a word of Friedrich August von Hayek or Ludwig Heinrich Edler von Mises. You have no knowledge of the destabalizing effects that central banks and government intervention has on the economy. Nor do you realize the amount of control that the financial sector has captured over the political/regulatory system of our country.
I don't know how much more good intentions capitalism can stand.
He brought forward the inevitable collapse of the deficit-based financial system by at least ten years.
Greenspan could always contend that keeping interest rates low was the only way out in the post 9/11 era to boost the economy. Just as now Bernanke's Fed is going to leave the interest rates near zero for the foreseeable future. They would vouch by it now, and twenty years later, even if it fostered another asset bubble or two in its wake. The argument would always be "There was no other way out".
Greenbuck claims a relationship between economic laws and financial history and aye, there's the rub, if you gather my meaning.
The primary reason borrowers were able to 'qualify' for loans was that banks did NOT check employment history, income tax returns or any other qualification for repaying loans.
Greenbuck is, and remains, an idealist. (He wasn't an early follower of Ayn Rand for nothing.) That is, Greenbuck believes that people act semi-rationally, ceteris paribus.
Sure, Greenbuck could have jacked up interest rates to 18% and stopped the housing bubble.
And. 'Colossal errors' are always clear with hindsight. But. Everyone, statesman and political hack alike, makes them.
You are right to complain that Greenbuck praised home equity mortgages. But, even though home equity mortgages (turned out to have) caused more harm than good, they also caused good.
You, Peter Schiff, more than anyone, should not anthropomorphize economic woes. Don't promote Alan Greenbuck into the ranks of the Economic Pantheon. Alan is in semi-control of his ego but even HE wont be able to resist that kind of non-fiduciary promotion.
The causes of the economic collapse are many and obscure. Certainly Peter Schiff, the Don Quixote of economics, knows that.
The 'private sector jokers' are jokers, true, but that does not absolve them from blame. Absence of creativity, intelligence and foresight, and predominance of greed, blindness and selfishness absolves nothing.
The oligarchs are as in control IF anyone is. And I certainly can't verify that anyone is or ever will be.
But I can guarantee than Alan Greenbuck is NOT.
Alan Greenspan, supreme jazz economist of the early twenty first century and mocker of classical, joker economics, deserves some admiration, certainly.
Please don't deny him that.
I think you give Greenspan too much, pardon the pun, credit. Everyone was just acting like they were at a frat party... it was a booze cruise except the money was flowing.
peter, you are right about greenspan.
greenspan once said it is impossible to spot a bubble.
but recently, he reportedly said that the bottom is here and housing market has stabilized.
mmm so he couldn't spot a bubble, but he could spot a bottom?
On May 17 04:08 AM Fighting Yoda wrote:
> Peter you are right Greenspan is morally and intellectually corrupt.
> He has caused the greatest harm not just to US but world economy.
> He also brought the prestige of America down as savvy bankers. Lula
> the Harvard educated Brazilian president said a few weeks ago - "blue
> eyed white bankers told us they knew everything, but now we realize
> they knew nothing".
>
> Greenspan argument that he had no control over long term interest
> rates is obviously false in this context because the mortgage financing
> was being done with short term borrowing as suggested encouraged,
> and financed by him - MBSs and ARMs.
>
> Greenspan's bigger problem is of course he not only does not recognize
> bubbles when he sees them, but actually encouraged all of them -
> dot com ‘new economy’; homes - ‘home ATMs’, ‘option ARMS’
>
>
Shine on you crazy diamond!
First, the world could slip into war, in which case national economic policy will slip to the background in favor of military and political strategy.
Second, the US will fade into economic stagnation, similar to Japan since it's financial crisis in the '90s. It's influence will wane and the world will not be as influenced by the political stunts and financial direction of Washington.
Third, Washington could miraculously wake up from its drunken haze of bipartisan political squabbling and confusing array of policy contradictions and become a responsible, forward-thinking government. Most unlikely. But we can quietly, in the back of our minds, have hope.
There should be no FED artificially manipulating rates then these problems wouldn't occur as each institution would be responsible for its own risk assessment.
Mr. Shiff , you have many great articles but your Crash Proof book underestimates the global inter-dependence of each countries economy.
China sells lots of stuff to USA , if it could sell it at home it would.
Canada sells oil to the USA , if someone else would buy it they would sell to them .
The USA is a major consumer that many countries EXPORT to which is favorable to them, without the US economy everybody else's economy tanks too so there are no safe places except a cave or Mars.
You question US statistical numbers but how about Communist China that has no free speach? How can its major purchaser (USA) be in freefall and their GDP is only off slightly?
Have you seen Canada's , Korea's , Singapore's ? Theirs has fallen which makes sense . The report that China's hasn't has to be a LIE.
The market economy works with reasonable rules. Removal of Glass -Stegall was wrong, uptick removal wrong, fixing interest rates by the FED has been a diaster.
I am pretty sure Peter knows this (especially being the son of Irwin), but as he often appears on mainstream media if he starts talking that way he probably won't be invited back to share his opinions. They already see him as a pariah since his views are frequenly far outside the myopic views of other guests and commentators. Since he isn't a yes man and doesn't conform, talking about the greater "conspiracy" as it has been labeled would diminish his exposure on national TV.
I hesitate to use the word "conspiracy." This isn't about UFO's, ghosts, or some other 6th sense experience. They are simply a group of wealthy families and individuals that systematically control the world by pulling financial levers. Is it really that hard to believe there are some greedy, wealthy people out there that exert a lot of power that crushes the common man? The song and dance we see Greenspan doing is nothing more than what an insider would be expected to say and do.
The simple fact is that even ordinary human beings (who have the cognitive faculties of hunter gatherers and an inordinate interest in the rear ends of females) are able to game the system when given a chance - aided by a swarm of talented but unscrupulous professionals.
A more basic fact is this: cultural and technological evolution is much faster than biological evolution. Therefore, most human beings do not have the intellect needed to cope with our high tech economy in a constructive and stable manner.
It will be no surprise if the administration, as advised by its distinguished banksters, proposes a not quite adequate lukewarm porridge of reforms. There are any number of distinguished economists and prosecutors who could do better.