Why Is John Mauldin Defending Greenspan?

I hope he doesn't remove me from his mailing list because John Mauldin's Friday night e-letter is an essential part of my weekly reading schedule.

But, last week's edition contained such a remarkable piece of blather that it made me wonder if he was having some sort of a personal crisis.

Even erstwhile sychophants like Alan Blinder aren't defending retired Fed Chairman Alan Greenspan anymore.

Why would a section titled "In Defense of Alan Greenspan" show up in what is otherwise a very sensible and insightful correspondence sent out every week to a million readers (well, maybe just 999,999 this week).

Was this some sort of a cry for help?

Was this like when my cheating best friend/co-worker made the off-hand comment, "What's wrong with fooling around a little?" some fifteen years ago? There were a few rumors, but no one really believed at the time that there was any truth to them. Six months later, after his wife found out and he came home to find all his worldly possessions sitting on the sidewalk, that off-hand comment resounded in my head.

Anyway, its motivation is a mystery, but here it is:

In Defense of Alan GreenspanAlan Greenspan is routinely blamed in many circles for creating the housing bubble. It was his keeping rates too low, we are assured, that was responsible for the run-up in home prices. Now, he probably did keep rates too low for too long, but I am not certain that we can lay the blame at his feet. He had a lot of help.

First, a point made by Peter Bernstein. Housing prices rose by almost 50% from 1998 to 2001, before Greenspan started on his rate-cutting binge. 50% in three years when the Fed funds rate was over 6% is not exactly encouragement from the Fed to buy homes. It seems people were ready to do it without low rates. So, a good part of the bubble was not due to lower rates.

And home prices continued to rise rather sharply, even as the Fed began to raise rates in 2005-6. We built 3.5 million more homes over the last ten years than the trend growth suggested we needed. They were not all built during the period of low interest rates.

While low rates did help, the bubble was aided and abetted by sloppy lending practices. It now looks like some two million people took out loans they are going to have difficulty repaying, and are likely headed for foreclosure. Rating agencies labeled these loans as AAA credits. Mortgage and investment bankers sold them to all manner of institutions.

All these culprits took advantage of the low rates, but that was not the cause of the bubble. If proper lending practices had been followed, there would have been far fewer buyers and less building, less speculation, and so on.

Greenspan, in hindsight, should have raised rates sooner, which I said at the time. And lower rates did make homes more affordable. No question about that. But to lay the blame for the housing bubble at his feet is not entirely fair. He had a lot of helpers who did the really heavy lifting.

Yes, he did have a lot of help, but, it's not as if blame is indivisible - if the words were, we can't lay "all the blame" at his feet, that's one thing. But, to say, we can't lay "the blame" at his feet is another.

This sounds a lot like "no blame" should be directed his way.

As you have read here for quite some time now, there is plenty of blame to go around in this mess - lenders, borrowers, rating agencies, etc. - but, how could the former Fed chairman be reasonably excused?

If you had to pick one single person to blame for the latest bubble bursting, Alan Greenspan has got to be in the top five on almost everybody's list.

And to offer such flimsy evidence in his defense ...

1. Yes, house prices were already rising while the stock market bubble was wending its way to its inevitable pin. According to the S&P Case-Shiller 10-City Home Price Index, in the four years prior to 2001 (not three years as noted above, at least not according to this index), home prices rose 50 percent as shown below. This follows outright declines from 1992 well into 1996 as a result of the last housing mess 15 years ago.

A 50 percent gain over four years is just over 10 percent per year, which, given the previous downturn appears to be a somewhat ordinary rebound and is certainly not evidence that monetary policy is irrelevant when it comes to home prices.

2. And those "baby step" interest rate increases in 2004-2006? They just emboldened anybody having anything to do with real estate and mortgage lending - with each new baby step at about six week intervals, everyone looked around and said, "Man, ain't this great? They're raising interest rates and home prices are still going up $10,000 a month."

Nearly everyone knows there can be up to a two year lag in interest rates affecting the broader economy (except condo-flippers, of course). One look at the chart above and two years sounds about right.

3. As for the complete omission of the Federal Reserve's regulatory role in the housing bubble, that's just unforgivable. It's like defending a criminal without ever saying where the defendant was during the crime - refusing to provide an alibi.

This Wall Street Journal story($) from a few weeks ago addressed the issue nicely:

Because of its high profile, the Fed draws disproportionate scrutiny from lawmakers and others for lapses in banking oversight, even though the Fed shares its regulatory authority over banks with the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and state banking supervisors. The Fed alone, under a 1999 law, oversees bank holding companies, which control all the country's largest banks -- but not the largest thrifts. The central bank had 1,555 bank examiners as of June, down slightly from 1,578 in 1997, though the assets it supervises nearly tripled in that time to $17.6 trillion.

The Fed has failed "to provide the appropriate supervisory oversight for the major money-center banks," Harvard economist Martin Feldstein wrote in a recent opinion piece in The Wall Street Journal. The Fed, he said, believed the banks had adequate capital "because it gave far too little weight to their massive off balance-sheet" vehicles.

The Federal Reserve is one of a handful of regulatory bodies - a fact that current Fed Chairman Ben Bernanke is now painfully aware - but it has, by far, the largest megaphone.

When it comes to all matters related to money, credit, and debt, the Fed has the largest "bully pulpit" in the universe.

While the housing bubble was still inflating, what was that bully pulpit used for?

1. To move MBS origination from the GSEs to Wall Street
2. To successfully fight any substantive regulation of hedge funds
3. To encourage borrowers to take out adjustable rate loans
4. To praise subprime lending and other "financial innovation"
5. To repeatedly dismiss the housing bubble as just "froth"

Your honor, the defendant really deserves a better lawyer if these proceedings are to continue.

Comments

[ikkyu]

Greetings Mr. Iacano,

You do lay out a case here and at least it is defended. Nonetheless, i remain entirely unconvinced. I would call your attention to the work of Dr. Schiller that shows over the long term home prices have little to do with interest rates (it is all accessible online).

Your graph is not only unconvincing. but it is only a single business cycle for housing. It goes from parabolic (before the rate cut) to 45 degrees after. A perfect inverse correlation would be much more obvious, like the USD and gold.

Actually, none of this stuff will help in the seeking of Alpha as it were. If you have a theory try and publish it academically and see how far it takes you! Greenspan could do it. Mr. Mauldlin could do it. Axe grinding is probably not alpha-conducive.

Best wishes from Osaka,
john

[flyoverman]

Greenspan was the person with the most authority to slow the bubble, but instead aided it. He deserves his share of the blame and typically the lead person is often the one who receives the "naming" privileges... so it is the "Greenspan bubble." .. but who really cares? He just needs to mature and quite trying to blame others. He's no statesman, so don't listen to him.

[Tiffani Mauldin]

I'll make sure he does not remove you :) He likes to get people thinking! - Tiffani

[RWLM]

Maudlin is the sappiest, most avidly right-wing financial commentator today. His ego knows no bounds. I have had several sharp e-mail exchanges with him over the years and I always come away realising that he is a shill for his clients and a wannabu guru for calm and levelheadidness (the Muddle-Through scenario).

I await with glee seeing his nonsense utterly discredited by the markets and the economy, watching him writhing and heaving his way out of his self-imposed hole. Of course, he'll have some readymade excuse to exonerate himself (like he does Greenspan).

Why does he think we are interested in the weekly goings-on of his family and his whereabouts and travel plans? Is he such a godly figure that we should worship his and his family's every move? Look, I'm really sorry his daughter recently had a (benign) breast tumour but I really really couldn't care less, if truth be told...

[RWLM]

'Greenspan's Legacy Of Debt', By Paul Kasriel (a lot more knowledgable, accurate and down-to-earth than Maudlin)...

web-xp2a-pws.ntrs.com/content//media/att...

[deecee]

Nice article, Tim.

Stopped reading Mauldin a few months ago. I also think he went off the deep end, especially after his publications from George Friedman of Stratfor... what a joke. I especially "like" Friedman's "prophetic" book on the upcoming war with Japan www.amazon.com/Coming-War-Japan-George-F... which shows an amazing ignorance of Japan's adulation for the US. I know, I've learned Japanese (in addition to Spanish/German/Italian/French/Latin/ASL and some minimal Chinese/Portuguese). I think these folks, despite their "intelligence" agencies and super-computers still fail to understand human nature.

Show people all the charts, statistics and lies you like, but when they don't follow "common sense" then it's probably too good to be true. (Buffett thinking)

I sadly agree that JM sounds like a shill for his clients. Mauldin otherwise could sound like a decent family man with good morals/values.

@ John in Osaka: The academic community is filled with charlatans and jerks. I know, I've a doctorate and I take great pleasure in debunking the idiots. Academia is filled with people completely lacking in common sense, despite what their "statistics" or "research" tells them. Just look at Long Term Capital Management.

[nickgogerty]

People focus a lot on prices of homes and HPA, the other side of the component never rarely gets attention. Affordability. Based on historical affordability metrics, we have 10% more to return to the mean. nickgogerty.typepad.com/designing_better...

[ballsschweaty]

Mauldin is a war monger inflationist just like his neocon buddies. His muddle thru scenario depends on ever increasing war costs and continued devaluation of the dollar via massive printing and govt. bailouts if needed.

[gordon]

Did all here and Maudlin forget it was Greenspan, when 30yr-fixed rates were around 5 1/2% (close?) urged borrowers to get adjustables? That was a crucial moment he could have plugged the dike. I'm sick of Maudlin and all the other Bush-apologists for these dissastrous last 8 years. Tiff, I can't wait for your post on the "esteemed "Maudlin telling us where the WMD went.

[flow5]

Greenspan is lame. Collosal monetary flows (MVt) are required to "validate" housing prices. This is self-evident. The “administered” housing prices would not be the “actual” market prices were they not “validated” by (MVt)

He also supported run-away financial innovations as well as disastrous deregulation.

[Tim Iacono]

Tiffani,

Thanks for having a sense of humor!

[whidbey]

Why doesn't John tell us what to do about inflation? It is no less difficult to deal with than Fed policy in a failing marketplace. I suspect all of this is heading toward deflation - eventually. As I read history (doctorate and all) no one seems to know how to manage deflation. Maybe we should stop managing and go to asset backed (I hesitate to say it - PM) money? Good discussion. Love when you guy bear your yellow fangs.

[Clyde]

I also stopped reading Mauldin a few months ago after one too many columns shifting blame for the U.S. state of affairs from the administration and the fed to the "irrational" markets. Spoken like a true Republican. I let him know it too, he just seems detached from what is going on on the ground, as many in the money management business at that level tend to be. Tiffani, I do like it when he gives the spotlight over to other commentators.

[Mihael]

Well, the search of scapegoat to blame wil certainly help to resolve the matter. But maybe it's better to look at the mirror ?

There's no one to blame except the reckless behaviour of American consumer.

Does the finding the scapegoat to blame

[Jack Yetiv]

I have a few questions.

Who forced the subprime borrowers to borrow money they could not afford to pay back?

Were any of them children withou legal capacity to enter into binding contracts?

Assuming they were adults, did these borrowers not have the obligation to become informed as to (a) whether home prices always go up, (b) getting a "variable rate loan" means that your payments are likely to go up in the future?

Did their closing papers not indicate maximum interest rates on the loan? Maximum monthly payments?

Were they unable to discern a possible future problem if their monthly income was $2500 and the maximum possible loan payment could reach $2000?

Jack Yetiv