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."
"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