Greenspan again finds the Fed blameless in housing bubble

Alan Greenspan just cannot bring himself to say, "I'm sorry."

The former Federal Reserve chairman wrote an op-ed piece for the Wall Street Journal on Wednesday that repeated his favorite refrain: The Fed’s easy-money stance of 2002-2004 didn’t cause the housing bubble.

It wasn’t the rock-bottom short-term interest rates of that period, as dictated by Fed policy, that fueled the housing mania, Greenspan says.

Rather, he blames "the decline in long-term interest rates across a wide spectrum of countries" from 2000 through 2005.

Long-term interest rates, Greenspan wrote, became "disconnected" from Fed policy in that period as rising wealth in China and other foreign countries was plowed into Treasury bonds and other long-term fixed-income securities -- pushing long-term rates down, including on 30-year mortgages.

In other words, the housing bubble was "all the fault of those pesky foreigners," says Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

In a commentary of his own on Wednesday, Shepherdson said Greenspan’s attempt to absolve himself and the Fed was "nonsense."

Shepherdson wrote:

"The single biggest driver of the recession today is the meltdown in the adjustable-rate mortgage market, and in particular the subprime adjustable-rate mortgage market. The explosive growth in that market is directly attributable to Fed policy.

"When the Fed cut to 1% in mid-2003 -- we said at the time it was an enormous mistake -- it pulled into the adjustable-rate mortgage market millions of people who liked the rates but did not understand the adjustable part of the deal."

Adjustable-rate loans typically were priced off short-term interest rates, including the one-year Treasury bill yield and the London Interbank Offered Rate, or LIBOR.

As housing bubble inflated, Shepherdson notes:

"Mr. Greenspan lauded lenders’ ‘innovations.’ The number of subprime ARMs rose more than ninefold from late 2000 until the peak in mid-2007, with three-quarters of the increase coming between mid-2003 and mid-2005.

"The delinquency rate on these loans, by the way, now stands at 24.2% and it is still rising rapidly. Prime fixed-rate deliquencies are at 3.92%.

"Mr. Greenspan ought to have used the pages of the Journal to apologize to the nation. Instead, his piece will stand as a testament to his hubris, or perhaps his delusions."

-- Tom Petruno

Photo: Alan Greenspan. Credit: Jin Lee / Associated Press

Comments

[W. D. Smith]

Greenspan is confirming that he has been delusional for many years. His performance proves that noone should be able to serve in agovernment post after age 70 or at most 75 years of age. If we cannot find a qualified person who is still on top of their game, we should leave the job vacant.

[mr.bilko]

All Alan Greenspan had to do to stop the housing bubble was to go before Congress and get Congress to mandate that all loans required a 20% down payment, like it used to be before 2002. The majority of loans issued between 2002 and 2007 were zero down, 100% financing. It does not take a rocket scientist to figure out that the housing bubble was caused by people with no money, getting 100% financing, bidding against other people, with zero down.

The Alan Greenspan and the "interest rates were too low for too long" argument is an easy target unfortunately it's avoids the real issue. The housing bubble was caused by 0% down. You do not have to be an expert in risk analysis to deduce that zero down on a $500K mortgage in the Inland Empire is a horrifically bad idea.

[jdj]

Thank You Tom.

I read Greenspan's piece yesterday (the same drivel he's been regurgitating every six months, it seems) and was again frustrated that he always points to long-term rates when discussing mortgages. When it's clear that this bubble was financed by short-term rates.

[Wallstraffed]

Low interest rates may have allowed this to flourish but did not bring this on. Forgetting all of the "no doc" mortgage brokers, wanna be Countrywide low level crooks, lawyers who papered over all of the packaged fraud, boom-or-bust homebuilders, etc.:

1) If the golden boy and girl MBAholes on Wall Steet at Goldman, Morgan, Lehman, Bear et al had not packaged up all of this subprime fraud as CDOs, sprinkled some mathematicians' magic powder on the "products" and then pitched them to the world;

2) If the Republican Executive branch and Congresspersons (Bush, Cox, Bernanke, ex-Goldman Paulson) had not sat idly by watching the once universally acclaimed "bullet proof" Fannie and Freddie getting fleeced by our Wall Street criminals at the same time they were doing an end run on home lending controls;

3) If the Democrats in Congress (Frank, Dodd, Maxine W.- you know who you are) had not sat idly watching this subprime slime unfold because their credit worthless constituents were now getting to live in homes they could not afford;

then this would not have happened.

Madoff was easy pickings. It is time for the U.S. Department of Justice and states to indict and jail the deep thinking Wall Street fraudsters now. Remember, it was also their continuous deception that you had to be "all in" with your meager retirement funds (so you could be "all out" after their carnage was complete).

[martscan]

Greenspan has never had a problem with the 'bubble' of his narcissistic egomania. I recall his stating in his book, "The Age of Turbulence", that he delighted in practicing his convoluted "Greenspanspeak" gobblygook to Congressional committees. He hasn't changed.

[Richard T]

Greenspan is a perfect example of why we need to have strict term limits. Of course, the Fed was the main reason for the bubble. The Fed Created the stock market bubble as well by pumping out money for Y2K, when they started pulling it back in the tech stocks crashed in early 2001. A computer could have done a far better job than Greenspan.