Have you had enough Alan Greenspan yet? Just in case his interview with Greg Ip today isn't enough for you, I should also point out his 1,638-word "response to my critics" over at Martin Wolf's FT.com forum. There are some reasonable points in there, and some unreasonable ones too:
Some argue that adjustable rate mortgage [ARM] originations fueled the bubble. Yet the ARM's share of total originations is a very weak forecaster of home prices, implying ARMs, although a source of cheap financing, are not a determinant of home prices. If ARMs were not available from 2001 to 2004, home purchases presumably would have been financed with long term debt, which was also very affordable.
This is just another way of saying that low interest rates don't cause housing bubbles, and it's silly on its face. ARMs, in terms of monthly mortgage payments, were significantly cheaper than long-term debt - and, more to the point, they were generally available to subprime borrowers who wouldn't never have taken out a long-term mortgage of that magnitude. Borrowers almost never took out mortgages with the intention of defaulting: they needed to think that they could make their monthly payments.
With ARMs, subprime borrowers could make relatively low interest payments for the first one, two, or three years. If they had been forced to take out a 30-year mortgage instead, they could never have made the higher initial interest payments: Remember that the yield curve back between 2001 and 2004 was still steep enough that there was a significant difference between 30-year interest rates and 1-year interest rates.
You can get to the same place in a different way, by looking at the magnitude of declines in the housing market. The biggest drops aren't where house prices rose the most, as you might expect if this was a simple case of a bubble popping. Rather, they're where there were the most subprime originations. There were no subprime borrowers in Manhattan? The bubble's still inflating there. House-price purchases were overwhelmingly made by subprime borrowers in California's Inland Empire? That's where the price declines have been harshest.
So when Greenspan says he's not at fault because there were housing bubbles elsewhere in the world as well, he's missing the point that those bubbles haven't burst - not in nearly as harmful a manner as the US bubble, anyway. And the reason is that there might have been a housing bubble, but there wasn't a subprime bubble.
Even if Greenspan's not responsible for the housing bubble, then, it is fair to blame his low overnight interest rates (if not him personally) for the subprime bubble which was fueled by the fact that subprime borrowers invariably borrowed short on a long-term mortgage.
Still, you can see how Greenspan gets aggrieved by his critics. Just look at how Willem Buiter lays into him in the comments:
By overselling, at home and all over the world, the virtues of American-style transactions-based financial capitalism and light-touch regulation, Mr. Greenspan has done more to harm the cause of decentralised, competitive market-based financial systems based on private ownership, than even Charles Ponzi.
Alan Greenspan's period as Chairman of the Board of Governors of the Federal Reserve System represents to me the nadir of central banking in advanced economic-financial systems during modern times. While monetary policy was only mildly incompetent, the regulatory failures were horrendous. The US and the world economy will pay the price for Mr Greenspan's misjudgements and errors for years, perhaps decades, to come.
Yikes!
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More of the Greenspan interview
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If Bear is now a public utility, what the h*ll is Citi, JPM, CFC, WM, etc? The bottom line: Bankers are rational economic actors and respond to incentives; that is, the slope of the curve. You give me an opportunity to get an average 2.5% margin from June 2001 through June 2004, what do you think I will do? Greenie create the bubble, not just the subprime bubble. Feel no remorse in telling him, and the rest of the rational "Miltonian" economists what he has become: a socialist economic planner who thinks the central bank can "plan" its way out of problems. No. And again, no.
the deeper he digs that hole. He should be thru to China any day now.
Good article
Please support, pass on, and link this proposal:
TakeBackTheFed.com
Apr 09 08:28 AM
Re "Greenspan on the US Economy..."
Greenspan is great with words, great to read and listen to. But something stinks around the Fed. In his book "The Age of Turbulence" he writes"...Rising leverage appears to be the result of vast improvements in technology and infrastructure, not significantly more risk-inclined humans. Obviously, a surge of debt leverage above what the newer technologies can support invites a crisis. I'm not sure where the tipping point is." (slightly paraphrased) And now "...We have not confronted a situation like this in over half a century," and, "The problem is not the lack of regulation but unrealistic expectations about what regulators are able to prevent." Well someone should explain the $530 trillion in cdos as it rips it's way through the belly of the economy like a butchers knife. (2nd placement, same comment)
exactly (except I do not think there are $530 trillion in dcdos, more like $45 trillion, but that figure could be right for all OTC derivatives).
The point is we cannot trust the Fed. We sit back like dumb oxes, watching this happen, then at the Fed's behest, we open our wallets and pay for it. In fact we may be doing much more than opening our wallets.
We have allowed congress to shirk their reponsibility to create money and manage the credit system. We have allowed congress to create an independent body, of which we have very little oversight, which performs this function.
Now the treasury wants to expand Fed powers, but keep it independent. They are basically saying, 'Go on, keep chewing you cud you dumb oxes. We will take care of the problem. And by the way, open your wallets.'
I say, 'No, TakeBackTheFed.com'.
I do not think the congres sis a group of rocket scientists, nor necassarily any better than the Fed. But the congress can create oversight, open the Fed's books, and set more rules- like if investment banks want to borrow from the Fed, they need to open their books (The Fed is now in the investment banks, but I doubt congress has seen any of their books). The congress may take a look and put some entities into bankruptcy.
The Fed caused this problem, and we are going to have to pay for it. Let's TakeBackTheFed.com , and solve it in the open, iontelligently, and modify the system as we go so we end up with a financial system that serves the economy rather than vice-versa.