Greenspan Blasts Housing Bubble He Helped Create

By Peter D. Schiff

The housing bubble was former U.S. Federal Reserve Chairman Alan Greenspan’s doing - plain and simple.  He gave birth to it, nurtured it, protected it, and guided it during every stage of its development.  In fact, if there were a deck of playing cards featuring the key players in this debacle, Alan Greenspan would be the ace of spades. 

So, it was strange to hear Greenspan, in an interview last week on CNBC, cast his eyes upon the charred landscape that was once the national real estate market and offer high-minded criticisms of the obvious excesses and irrationalities that brought on the devastation. 

Greenspan’s attitude was akin to a retired drug dealer lamenting the urban blight caused by rampant addiction.  The former Fed chief noted that housing prices were still too high, that too many homeowners were upside down on their mortgages, and that Fannie Mae (FNM) and Freddie Mac (FRE) were accidents waiting to happen. 

Methinks the serial bubble blower doth protest too much.

Indeed, the fact that the media still holds this joker in such high esteem is a testament to just how clueless most journalists really are.  Rather than fawning over his every word, journalists should be grilling him like they’re interrogators for the CIA. 

Though, in his new post-Fed-Chair incarnation, Greenspan does show an increased willingness to speak the truth: Perhaps sharp candor generates higher speaking fees than murky academic jargon.  But conveniently missing from his belated admission that home prices are too high is the concession that his irresponsible monetary policies propelled prices to those heights in the first place. 

In fact, even as the housing bubble was inflating, Greenspan repeatedly denied its existence.  He took every opportunity to talk the real estate market up and went out of his way to justify irrationally high home prices.

His concerns about upside-down mortgages are particularly offensive given his consistent praise, when he was Fed chairman, of the ability of home equity extractions to fuel economic growth.  In fact, during the final years of his tenure there was no greater proponent for cash out re-financing than Alan Greenspan.  

Greenspan not only commended homeowners for their sophisticated approach to "managing their home equity" on a routine basis, he applauded Wall Street and mortgage lenders for their creativity and ingenuity.  Of course, home equity extractions are largely responsible for so many homeowners now owing more than their homes are worth! 

However, his most brazen contention was that he had tried to warn us of the dangers that Fannie and Freddie could pose to the entire economy.  Excuse me, but when exactly did he sound this alarm? 

His points that Fannie and Freddie should not exist, and that the moral hazard of private profits and socialized losses are an accident waiting to happen would have been right on point had he actually made them while still head of the Fed.

It’s just too bad Maria Bartiromo did not remind Greenspan that the accident has already taken place.  Fannie and Freddie’s flawed design may have rendered them destined to slip, but it was Greenspan himself who supplied the banana peel.

Original post

Comments

[chanel]

Mr A.Greenspan is as daring in his utterings as all the so-called financiers in charge of our economy. I do not see any reason why all this people who are responsible for the actual mess should not be brought to court. Oh sorry! I forgot. They are too well connected! At least your article is exposing them to the court of public shame. Well done!

[BS Detector]

"The housing bubble was former U.S. Federal Reserve Chairman Alan Greenspan’s doing - plain and simple."

How many loans did Greenspan make to buyers without checking their credit?

How many loans did he make without requiring any significant down payment?

How many houses did he buy expecting them to appreciate in value?

How many houses did he buy that were clearly more than he could afford?

Answers: None, none, none, none. Greenspan's Fed fostered the environment that allowed imprudent decisions to be made by others. How can you hold him accountable for that? By the way, it also was the environment that allowed the economy to grow for a prolonged period of time with low inflation. Is not this the primarygoal of the Fed?

"His concerns about upside-down mortgages are particularly offensive given his consistent praise, when he was Fed chairman, of the ability of home equity extractions to fuel economic growth."

I'd love for you to provide actual references to Greenspan ADVOCATING home equity extractions. Since you haven't, I can easily assume that you are confusing a discussion of movements in the economy, where clearly such moves by individuals were helping to drive the economy, with a position where he was actually encouraging individuals to do this. Where is the harm in this?

[xsuddensam]

To BS DETECTOR:

Keep in mind the S&L disaster of the 80's & 90s'. It's the same old scenario. The Fed pumps huge amounts of money (liquidity) into the economy by loaning low interest money to the banks. What do the banks do? They fall all over each other making stupid loans to unqualified borrowers relying on ever increasing property values to mitigate their risk. We all know what happens when the real estate market crashes. This is not a new story.

Greenspan should have known better.The problem is that the Fed is comprised of bankers and it was essentially created by the bankers and for the bankers.

We need to get rid of the banker barons and restructure our financial system on sound economic principles and we need to do it quickly or our nation as we know it will not survive.

[AlanAstute]

Amen to that. I am shocked that media interviewers fail to do their duty to their profession by not calling out this kind of 'teflon' behavior by ex-federal reserve chiefs. Before all the other bank CEOs are prosecuted for their actions, Mr. Greenspan needs to spend some time in Uncle Sam's spa to mull the incredibly destructive consequences of his actions. For all those who claim his tenure was a period of high corporate profits, think accounting ledgerdemain, stock option excesses that soaked up most of these 'earning' and unscrupulous behavior by captains of industry on an unprecedented scale. A huge bezzle factor was in play during this period. Actions like this should neither go unnoted nor unpunished. Democracy will fail without proper regulation of its tenets.

[indyfan]

It would be interesting to see how Greenspan profited during these boom years and from whom. That's all you gotta do. Follow the money trail and it will lead you to all of your answers about anything. I suspect, the only rationale for his policies during the day was that he was somehow a direct beneficiary of som of the largess that was being concocted. I would LOVE to see his tax returns from 2003-2006.

[dg arc]

It is common to blame everyone except the Joe moron public -
who lied to the mortgage issuer about his income
who lied to the mortgage issuer about his assets
who lied to himslef about his ability to repay
and now sits there blaming everyone but himself and proclaiming naivity - 'o but I am too simple to understand these complicated mortgage contracts written by these wall street sharks .... bla bla bla

Listen Joe American - If you are old enough to vote, old enough to drink, old enough to have children you are old enough to understand mortgage and its repayment. So stop moaning and pony up the price - its time to pay for your lies, your bullshit and most of all your inability to know/ignore the difference between right and wrong.

[JAAG]

BS DETECTOR you should apply the detector to yourself !!!!!!!! Nobody is saying that Greenspan wrote the loans himself but he did foster the environment for the banks to make them. It was the "irrational exhuberance" of UBS, CITI, Morgan Stanley, Stearn etc... under Mr. Greenspan's watch the very same environment he created and nurtured.
Mr Schiff well done the article is 100% correct. All of these cowards from MSNBC, CNN, FOX, and the like do not have the courage and are a bunch of "push-overs" with their self interest at heart; they too are investors. They give a pass to all companies, CEO's and guests.
Here is the basically 2 problems:
1. 70% of the economy is comprise by the middle class and below (more or less those making $99,000 or less a year) but the FEDS cater only to Wall Street; and there it is our demise.
2. The other problem is that supply-siders have most business analysts and economists brainwashed. NEWSFLASH !!! supply-side economics does not work, Reagan tried it and had decent job creation but a huge deficit, overall results a wash. Bush II has tried it and it failed miserably awfull job creation, overall a disaster. Clinton utilize demand-side economics and Voila!!! overall great results great job creation and balanced budget; he actually left a surplus!!! As a matter of fact if you combined the "16 years" of Reagan and Bush II, and compared to the "8 years" of Clinton, Clinton created more jobs without deficits. On the other hand the republicans created less jobs and a huge deficit!!!
That is the bottom line , no arguments !!!

[User 227266]

"Methinks the serial bubble blower doth protest too much."
Me too! I have so much more to add but you know I can't say it much better than AlanAstute... teflon behavior

[puttster]

You can blast Greenspan because you don't need him; in fact, freelancers and blogs are the only place where you might find criticism of public figures. The white house press corps, Jay Leno, Maria Bartiromo - they all have to suck up and throw softballs in interviews because if they make their guests angry, they won't get another chance.

[Las Vegas]

Bankers seem to believe that they alone understand risk and will not lend an umbrella when it is raining; unless of course if they can sell it off later to Wall Street….

Wall Street comprised of cubicle sitters who believe they understand risk as they underwrite the large portfolios for a fee and then bless the risk that their newly created package is a safe bet to investors...

Investors are sucked in by greed and brokers who understand risk....

The funny thing about risk is that it is 'risky'. Making a loan on the belief that housing prices will continue an exponential growth rate and that credit history matters little and actual verification of income is secondary to even credit, not to mention the greedy Realtors who assist these borrowers in making a poor financial decision then refers them to the mortgage broker who earns front and back ended premiums from the bankers who understand risk...

Overall the system is very poor. Lending money based on commissions is not a sound practice as evidenced by the now empirical evidence

And now people are supposed to be surprised?

[Las Vegas]

To add, "liquidity" is the basis for inflation. Funny how inflation never reared its ugly head as housing prices were escalating at 20 + percent per year for a couple of years.

How convenient that housing prices are not included in the CPI, or inflation would have been rampant.

And this liquidity that was added through low interest rates has also allowed the USA drunken government to spend at a rate of nearly a Trillion Dollars per year adding the Iraq War spending and 1/2 Trillion Dollar deficits...

Now the USA has a basic structural problem economically. Its borrowing is at about 74% of GDP considering all government debt over $9 Trillion whereas the GDP is estimated around $13 Trillion...

We have bridges that are nearing collapse, social systems nearing collapse, banking crisis, and yes it is a crisis, and our Halliburton War Machine runs on just fine.

Blame Greenspan? Blame a country of greed and lack of basic economics understanding. Greenspan may have headed the liquidity, which in turn has created havoc also in the currency markets; but it was the political system of a "Homeowner(sinkin... Society" boasted and supported by the Administration...

Bloated rhetoric created this problem. Greed, lawlessness and stupidity. Blame Americans, and Greenspan is one of them, but not the only person to blame.

Americans got what they bargained for.

[User 209500]

Our economy is way too large to regulate with Interest rates alone.
Long term steady rates are necessary to foster long term steady growth.

The banks & mortgage brokers made & sold $100 million mortgages packaged together to Wall Street weekly... Wall Street in order to fuel this huge thirst for return kept lowering the Underwritting requiremnts. Not banks, they only let up on the underwritting requirements after seeing their applications start drying up.

Our Wall Street buddies sold these CDO's & packaged Mrtgs to investors here & abroad. Only when our Banks, Insurance Co's, Pension Funds, Unions, Municipilaties started to buy these vehicles did the ball drop.

Had our gov had regulations in the mrtg industry, these loans would never have been underwritten. If the same regulations barred our
institutions from investing in these vehicles, or required them to carry them on their books @ no value, this mess would not of occured.
The Gov needed to put the brakes on runaway home prices. Someone convinced the powers that be, that this could be accomplished by raising interest rates from 1%-5% in 6 months.
Mission accomplished!!!!!!
These same individuals failed to disclose the ramifications of this action. The tenicles of the housing industry spread into all aspects of our economy.
The brakes could of been applied to the housing prices with mortgage regulation!!! Simple!!!! steady growth, or retratction!!!!

NOT THIS DEVESTATING PRICE SWING IN EITHER DIRECTION.

People are greedy by nature, if someone is stupid enough to lend/give them money they will take it.

By the way this same irresponsible borrower helped raise the value of your home to its current level!!! Not complaining about that???

Greenspan was the initial catalyst by keeping rates low. @ 1% that is like free money. We need to charge & offer decent returns to foster long term growth & investment. Greenspan did not cause this alone he had help, unfortunately as in Iraq we don't evaluate our Exit strategy too well!!!!
By the way Iraq now has a huge $79 Billion trade/budget surplus!!
INCREDIBLE???? OIL!!!! WHY NOT PAY US BACK?????

[Canadian Guy]

One thing that is rarely discussed as a contributing factor in this debacle is the ability to write off all mortgage interest as a tax deduction. The bigger the debt, the bigger the write off. It removes the basic incentive of alot of people to pay down their debts.

I'm glad I live in Canada where that deduction does not exist and people do whatever they can to pay down their mortgages as fast as they can. The interest here is money lost to the banks and the faster our mortgages are reduced, the better.

[User 209500]

The mortgage interest deduction is capped @ 1,000,000 (1 mill) of principal.
This dedution is not a huge budget item & will not generate too much income to the Government; However, those renters who are contemplating buying, this deduction can make or break their decision.

[winslow]

Greenspan and his "Ayn Rand" philosophy thought he had all the answers (for everyone else). The inability to absorb other views has been the demise of this administration and Greenspan.

[daniela]

I solute author. He is so right!

[JohnP]

Perhaps we should seek the truth here. The housing bubble has never been about interest rates. It is about good intentions gone awry...

At the heart of the matter are Fannie Mae and Freddie Mac. I believe they are central to the housing and mortgage crisis. During the 1st Clinton term, he pushed to get more moderate and low income housing...which is not necessarily a bad intention. HUD/FHA was not flexible enough given its statutory constraints. Fannie and Freddie had not such limitations.

These entities grew their businesses for the past 15 years by increasing the depth and breadth of the underwriting scope.

Fannie and Freddie are the “gold standard” for mortgage lending. As they stretched their guidelines to the breaking point, they they did 2 things: First, they encroached on the traditional "just missed FNMA" lenders...forcing these lenders to look elsewhere for business or go out of business; and second, they sent a signal to the rest of the mortgage market to do likewise...make it easier...

Fannie and Freddie needed help, though. First, their watchdogs... OFHEO and Congress, had to not care. Second...they needed finaincing and Wall Street was only too happy to jump in...

This is not about the FED...or interest rates...its about Government gone wrong...Congress had all in needed to know right in front of itself...it either did not car or it did not understand. Its also about corporate greed at Fannie and Freddie and on Wall Street...and the messages they sent into the marketplace. And now, its about deflecting the blame to someone else...

To those posting here...if you Congress-person or Senator has been around for a decade or more...they should be the target of your angst and your queries...

As for the solution...tell your Congress-person or Senator it is at the other end of the rainbow. Stop trying to hide the problem in DC, stop the witch hunt and look in the mirror for those responsible. And please fix housing and the mortgage industry from the bottom up...on main street.

[Confident28]

While the housing bubble may have been a liquidity problem, its not the FED's fault. Between June of 2004 and June 2006 the FED moved the Federal Funds rate up 4% and yet mortgage rates barely climbed more that 1/2% point over that same period. That's theoretically a major shrinkage in the liquidity of the US economy with almost no effect on mortgage rates. The question is, where did all of that money came from to keep longer term (mortgage rates) so low. The answer is the huge current account balance the US has fueled by massive trade imbalances with China and OPEC. Because these nations artificially peg their currency to the dollar they are forced to pour BILLIONS (totaling trillions) of dollars into US markets. It's this massive inflow of dollars that financed the housing bubble.

[JohnP]

Interest rates only manage the market if credit criteria are consistent ..they were not.

[American D.]

Finally!!! Someone wakes (us) up.
Yet the law is still quietly inactive when it comes to astronomical fees and bad behaviors of the RE (agents) and banks...When garbage houses are being sold for the price of a mansion...(just take a look to what's happening in Queens NY!).
Yeah,poor Mr.Greenspan he has nothing to do with this tragic situation...The only person at fault here is that stupid (self)employee who dreamt of having a decent place to live with his family...No guilt on those overnight grown millionaires who built/bought cheap and sold expensive....with the blessing of the mighty Bank.
Yes,if nobody would buy this way....But life is short and rich Chinese are everywhere..to say at least...
Finally we are waking up and this is the best thing that could happen to America at this moment.

[pennies]

The author is spot on! My take is that Greenspan wanted to hang on to his job so badly that, since Bush wasn't taking the same advice he gave to Clinton, he didn't listen to his better angels and went along with Bush's efforts to pump the economy.

While there is lots of blame to go around (greed seems to be the underlining theme), without Greenspan being asleep at the switch, things would never have gotten so bad.

[bruin532]

Bingo get Bush re-elected.

[User 240095]

Alan Greenspan - the oxymoron of the economy. who elected him as chairman of Federal Reserve? This real estate slump was created by the Federal Government through the 'interest rate cut Rampage'. Mr. Greenspan (aka oxymoron) forgot that. He had no vision of the long term impact of that. Federal Government did it anyway to stimulate the economy to fund the war in Iraq. Poor bastards didnt even got the oil. Now everyone suffer...

[iThinkBig]

JohnP, bingo! It wasn't all of Congress not paying attention, it was a couple of dozen individuals that happened to be around during the Clinton years that were extremely familiar that it had become a personal safe bet. It always is when you create and defend the laws - In other words, legislating into thy own pocketbooks. It is this kind of collusion the Founding Fathers warned vehemently against and this financial crisis is not a new series of events either. Unfortunately for the American people, too much power has not been consolidated into one party that can manipulate the voters now or face losing there homes and further going broke if they don't dance the tune. And the rest are the sheep watching the main stream media on TV to see if Britany got cooked up and acted like a little whore again.

[Phil O. Math]

I agree with you, JohnP. However, I would take your comments a step further. It is our system that allows for this collusive relationship between big business and big government. The road to hell is paved with good intentions and Fannie and Freddie are examples of this.

The executive and legislative branches of government must be free to think and act in the objective interests of all their constituents. They cannot do this while their attention is constantly sought and consumed by well-funded lobby groups in DC. Congress, the Senate, even the occupants of the White House cannot help but become biases in favour of these lobbying interests when this is where all of their information and campaign funds come from.

I do not even blame lobbyists since they are only acting in their own interests, seeking their own advantage. They need to have their activities limited.

The problem is the system that allows this lobbying to take place and, since lobbying is so successful, effectively encourages corruption.

Stop blaming individuals and start looking at ways to fix the source of the problem: a system that encourages the corrupting influence of special interests and lobby groups.

[Jay Jay]

Good article, right on the button.

Addressing some other poster comments:
JohnP- You said the GSE's needed more regulation. The thing is, they have grown big enough that they are able to buy off the bosses of their regulator- hence no regulation. The system is broken, and they shouldn't exist.


User 209500- The home mortgage deduction simply inflates prices by the amount of the subsidy. To the renter, the tax benefits of renting are countered by the excess pricing due to the subsidy. Canada i a great example that housing market can exist with our this distortion. Phase out the HMD over a 10 year period.

winslow- Greenspan abandoned his Ayn Rand and hard money views after he joined the politicians in DC. Had he stayed true to his earlier wisdom he would have been right, but he wouldn't have been offered the chairman job either. It would have been offered to someone else that would promise to do what his political masters asked of him regardless of the long term consequences to the country.

Central planning is an ineffective at setting the prices of borrowed money as it is at setting prices of toothbrushes. Interest rates should simply be set by the supply and demand of savings. When savings scarce, as they are now, rates would be higher. This of course only works in a world where money can't be created from thin air.

Abolish the Fed, go back to an asset based currency.

Just because the politicians don't get the growth they seem to think the country deserves doesn't make it right to destroy the economic system. Being able to spend money without explicitly raising taxes is simply too seductive for the system to endure, regardless of the character of the people involved. This is why the original design of the country was the way it was. Unfortunately when the government came up against the restraint is was too easy to simply remove the restraint.

[User 232593]

you are all wrong.a rising tide lifts all boats & therewas no one who could pull the plug to let the tide out.that is our country.no one can say a word against goldilocks.after the collapse the finger pointing starts.i bailed @ 14,000dj.i never listen to talking heads.watch a cartoon & think for yourself.

[FP]

The sad end of the story is that the victims, hard working americans are loosing their properties just because they bought at the wrong time or got carried away as what everyone else was doing. Of course that was wrong but people deserve a second chance, it is too much too loose. Help has come too late for most of them. While government spends trillions of dollars and human lives dying elsewhere no one calls that unmoral or irresponsible. Deflate housing but save the people not the lenders who gave their money irresponsibly.

[truthinvesting]

I like Greenspan as a fed chief I dont like Mr andrea Mitchell trying to rewrite history All peopel do good and bad thingsAdmit them. If Bill Clinton just had said yes i was with a n overweight woman you know they all try harder the story would have gone away.Same with Nixon admitting his errors.Wall street is full of exceses and those who were reckless will suffer