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Greenspan again finds the Fed blameless in housing bubble

March 11, 2009 | 10:35 pm

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.

Alangreenspan 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