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- If I've said it once, I've said it a million times: The Fed did not cause - and could not have prevented - the housing bubble. - Alan Greenspan in a WSJ op-ed
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This news story has 13 comments:
However, one could also argue that the Fed should have been able to see that their control over monetary policy has waned over time, and therefore might have expected, at least somewhat, the decoupling of fed funds rates and mortgage rates, making them more cautious about lowering rates so dramatically to begin with.
Since the mid 1980s, the Fed has had its grip on the long-term rates weakened by foreign central banks' own internal policies (and policies regarding US debt) and increased flow of capital between countries, and short-term rates and "practical money" supply weakened by foreign commercial banks issuing credit cards and securities denominated in US currency. So they can begin a trend, but it's possible that the trend may then escape from their grasp. A chilling thought in regards to the current and dramatic policies that they are now embarking on.
His argument is that low long-term interest rates on mortgages are what caused the housing bubble and that he had nothing to do with this. This is false. He had everything to do with this.
Greenspan's inappropriately low fed funds rate made large amounts of money available to be sunk into some asset class. There was going to be a bubble in something and whatever that turned out to be (mortgage backed securities, housing, consumer loans) that was Greenie's fault. Period.
It is one thing to be wrong. It is another thing to be an utter quivering coward refusing to admit you were wrong and misleading those who could learn from these mistakes and would like to fix them and prevent them occurring in the future.
Greenspan is a disgrace of a human being.
The Fed has responsibility to manage the entire monetary system, not just the crude tweak of Fed rates. Clearly money supply is part of this.
The Fed Chairman also has his pulpit to use in cases where financial distortions give rise to dangerous bubbles.
The Fed seems to have been oblivious to these other forces and did nothing to warn or took no actions to counterbalance them.
Yesterday we saw Ben suggest that the Fed be allowed to regulate systemic risk. Has the Fed proved capable of such?
As the banker of the last resort, the Fed failed to respond to a massive bubble that they created. Recall shortly after Greenspan left, he said in a speech that history has not dealt kindly when risk premiums were so low. Risk premiums were so low from the wealth effect created by real estate prices. In addition, encouraging people to use option arms at the peak of the bubble as Mr Greenspan did was very irresponsible. To me this said, keep the game going until I can get out of here.
I can go on and on (allowing banks to lever up in a post Long-Term Capital environment - didn't they learn the lesson once?, not regulating derivatives and CMBS, etc, throwing money at any problem) but it will make me sick.
A recent scientific study was recently released by a noted psychologist. This study involved 15 Yale PhD students against a mouse in making decisions. The Yale minds always "over-thought" the problem and were right 52-59% of the time. The mouse was correct 67% of the time.
Greenspan is justifying his "correct" decision. Unfortunately for the citizens, decisions could have been made to prevent or mitigate much of the economic mess. It was obvious to us mice, when homes were zooming ahead much too quickly.
They are definitely responsible for "falling asleep at the wheel". It is fallacy that they can control anything - In fact, their attempts at control have driven us farther off the mark of stability.
Everyone Loves What Fractional Reserve Banking Does For The Economy Until Its Ultimate Outcome Manifests.
Exponential Growth Is NEVER INFINITE.
The graph is startling. From a starting point of 1/2000, with Fed Funds at 3% and inflation at 2.74%, the spreads between FF and the 30 year mortgage, the 1-year ARM, and the 10-year T-bill were 5.21, 3.61, and 3.67. By 1/07, these spreads had fallen to 1.0%, 0.2%, and the 10-year Treasury was trading at a discount to the FF rate of 0.5%.
The Fed simply does not have much control over long-term rates.
The progression:
In 8/01, the month before they started cutting rates, inflation was virtually unchanged but the spreads had narrowed to 3.95, 2.71, and 1.82.
Within 6 months they'd returned to about the 1/00 numbers. In 4/04, the month before they started raising rates, inflation was at 2.3%, and the spreads were 4.83, 2.65, and 3.5.
From this point, however, lending rates became very strange. FF was increased gradually over two years from 1% to 5.25% and inflation increased above 4%, but lending rates increased much more slowly or were flat. By 6/06, the month FF reached 5.25%, inflation was at 4.3%, and the spreads had narrowed to 1.43, 0.46, and -0.11 (!!!). The Case-Shiller index peaked this month.
From here, with the FF at 5.25%, inflation declined. Amazingly, so did lending rates. 5/07, the spread between FF and the 30-year mortgage was between 0.89 and 1.04, and between FF and the 1-year ARM was never higher than 0.30. The yield on the 10-year treasury remained negative compared to FF until December 2007.
If you really want to get to THE root of the problem, it was congress. Everything else was secondary because people will generally get away with whatever the law allows (and sometimes more).