"If they are too big to fail, make them smaller," former Nixon Treasury Secretary George Shultz said.
That quote was pulled from a long article about none other than former FOMC chair Alan Greenspan. And we agree with Sec'y Schultz -- and disagree with nearly everything Greenspan claims in the article.
Alan Greenspan usually surrounds his opinions with caveats and convoluted clauses. But ask his view of the government's response to problems confronting mortgage giants Fannie Mae and Freddie Mac, and he offers one word: "Bad."
In a conversation this week, the former Federal Reserve chairman also said he expects that U.S. house prices, a key factor in the outlook for the economy and financial markets, will begin to stabilize in the first half of next year.
Recall Greenspan's first Real Estate bottom calling attempt came in late 2006 "I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out. I don't know, but I think the worst of this may well be over." (Greenspan Says `Worst' May Be Past in U.S. Housing)
He repeated the calls many times since then. Most recently, in April 2008, when he said "the drop in U.S. home prices will probably end well before' early next year as the number of houses on the market diminishes, aiding an economic rebound."
Wow, that's three strikes in just one swing: Inventory remains high, home prices continue to fall, and we are still waiting for the economic rebound.
Now, Greenie is pushing back his bottom call into 2009:
"Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009," he said in an interview. Tracing a jagged curve with his finger on a tabletop to underscore the difficulty in pinpointing the precise trough, he cautioned that even at a bottom, "prices could continue to drift lower through 2009 and beyond."
Why this bottom call should be any better than the prior ones is anyone's guess. Perhaps it's because of longstanding scholarship in this field of study:
"A long-time student of housing markets, Mr. Greenspan now works out of a well-windowed, oval-shaped office that is evidence of his fascination with the housing market. His desk, couch, coffee table and conference table are strewn with print-outs of spreadsheets and multicolored charts of housing starts, foreclosures and population trends siphoned from government and trade association sources.
An end to the decline in house prices, he explained, matters not only to American homeowners but is "a necessary condition for an end to the current global financial crisis" he said.
"Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world's mortgage-backed securities. We won't really know the market value of the asset side of the banking system's balance sheet -- and hence banks' capital -- until then."
Wessel slid in an interesting aside into the interview about Easy Al: "At 82 years old, Mr. Greenspan remains sharp and his fascination with the workings of the economy undiminished. But his star no longer shines as brightly as it did when he retired from the Fed in January 2006."
He was being kind. Many of today's current woes are traceable right back to Greenie: Keeping interest rates too low too long was just the start. With his malfeasance in refusing to regulate the lending industry -- Wessel politely called it "regulating too lightly," but that's horseshit -- Greenspan made the ideological decision to allow the free markets to just sort it all out. That's whats happening now, and no one likes it very much (except a few hard core free market types, who find it all delightfully anarchic).
"Mr. Greenspan's housing forecast rests on two pillars of data. One is the supply of vacant, single-family homes for sale, both newly completed homes and existing homes owned by investors and lenders. He sees that "excess supply" -- roughly 800,000 units above normal -- diminishing soon. The other is a comparison of the current price of houses -- he prefers the quarterly S&P Case Shiller National Home Price Index because it includes both urban and rural areas -- with the government's estimate of what it costs to rent a single-family house. As other economists do, Mr. Greenspan essentially seeks to gauge when it is rational to own a house and when it is rational to sell the house, invest the money elsewhere and rent an identical house next door.
"It's the imbalance of supply and demand which causes prices to go down, but it's ultimately the valuation process of the use of the commodity...which tells you where the bottom is," Mr. Greenspan said, recalling his days trading copper a half century ago. "For example, the grain markets can have a huge excess of corn or wheat, but the price never goes to zero. It'll stabilize at some level of prices where people are willing to hold the excess inventory. We have little history, but the same thing is surely true in housing as well. We will get to the point where there will be willing holders of vacant single-family dwellings, and that will no longer act to depress the price level."
The collapse in home prices, of course, is a major threat to the stability of Fannie and Freddie. At the Fed, Mr. Greenspan warned for years that the two mortgage giants' business model threatened the nation's financial stability. He acknowledges that a government backstop for the shareholder-owned, government-sponsored enterprises, or GSEs, was unavoidable. Not only are they crucial to the ailing mortgage market now, but the Fed-financed takeover of investment bank Bear Stearns Cos. also made government backing of Fannie and Freddie debt "inevitable," he said. "There's no credible argument for bailing out Bear Stearns and not the GSEs."
Easy Al didn't go oh fer the entire interview -- he did get one thing right about Fraudy and Phoney:
"They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted -- with necessary taxpayer support to make them financially viable -- as five or 10 individual privately held units," which the government would eventually auction off to private investors, he said.
Hey! Me & Al agree about one thing! Go figure . . .
Is the Housing Bust Over? (December 2006)
Free Lunch: Myths of the Greenspan Era (January 2006)
Greenspan on Housing Bottoms (April 2008)
Greenspan 'Reputation Tarnishment' Tour Continues (April 2008)
Greenspan Sees Bottom In Housing, Criticizes Bailout
WSJ, August 14, 2008
Greenspan Excerpts: Housing Stabilization Key to Crisis End
Real Time Economics, August 13, 2008, 5:30 pm