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TMFBent (99.85)

Greenspan's Despicable "Not My Fault"

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December 12, 2007 – Comments (10)

This guy, architect of two of the big asset bubbles in history, claims he had nothing to do with them. Unreal. Here he is blaming the housing bubble on emerging markets.

Al, of course, ignited the fire in the housing market it two ways. By giving out money for free, and by refusing to exert his control (via official means or using his moral authority) over the rapid inflation in global credit and money supply. He knew darn well that the ponzi scheme of CDO financing was the primary inflator of home prices, yet he said nothing about it, did nothing about it, and still refuses to believe he could have done anything to stem it.

Not a surprise, because this very smart man is locked in a prison of excuse-making where truths are twisted to suit the convenience of his personal myth-making. Take his bogus rewriting of the history of the tech boom he presided over: Not only did global share prices recover from the dot-com crash, they moved ever upward.

Wrong, Al, dead wrong. The shares that pushed the stock bubble, the overpriced techs, have performed terribly. Giant swaths of them disappeared completely. Even the best companies have yet to reach those share prices, (CSCO, MSFT, DELL, HD) and it wasn't just tech. Look at WMT and HD too.

As a general rule, the stuff that was fairly or under-valued during the tech boom did well subsequently. The overpriced assets take forever to recover, and produce no return for decades. That's what's going to happen to homes, but it might take longer, especially if bureacrats believe flimsy excuses like Al's.

Why can't this man, faced with the consequences of his failure, simply admit he screwed up royal? Gotta live with his belief in the great man, and try to build his personal legend, even if that means taking to the pages of the WSJ to cry about how things aren't his fault.

10 Comments – Post Your Own

#1) On December 12, 2007 at 9:12 AM, TMFBent (99.85) wrote:

Forgot to issue a "hip waders 'n' shovel alert" for this remark:

Demand in those days was driven by the expectation of rising prices -- the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages.

Care to support that bogus contention, Al? Guess not, because you can't. In fact, the numbers from ARMs show that people took them out because they simply couldn't afford financing in any other way -- and that they relied on the belief in home price appreciation to convince them that spending beyond their means was fine. 

In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted).

Got numbers for this, Al? Why not? My guess -- they show that after ARM originations, the market slackened (not much) and marginal borrowers moved into the next line of "affordability" products designed to get them into overpriced homes at any cost. This was the Alt-A Liars loan stuff, option-ARM, etc.

C'mon, Grampy Al, the very name of the mortgage packages these yahoos were inventing "affordability products" proves that the tail was wagging the dog. A huge number of people could not afford to buy homes except through exotic, toxic financing, and that's why they took it. It wasn't a matter of choosing these because they were cheaper or more convenient than conforming, 30-year mortgages. It was the only way people could buy more than they could afford.

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#2) On December 12, 2007 at 9:45 AM, TMFBent (99.85) wrote:

Forgot to issue a "hip waders 'n' shovel alert" for this remark:

Demand in those days was driven by the expectation of rising prices -- the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages.

Care to support that bogus contention, Al? Guess not, because you can't. In fact, the numbers from ARMs show that people took them out because they simply couldn't afford financing in any other way -- and that they relied on the belief in home price appreciation to convince them that spending beyond their means was fine. 

In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted).

Got numbers for this, Al? Why not? My guess -- they show that after ARM originations, the market slackened (not much) and marginal borrowers moved into the next line of "affordability" products designed to get them into overpriced homes at any cost. This was the Alt-A Liars loan stuff, option-ARM, etc.

C'mon, Grampy Al, the very name of the mortgage packages these yahoos were inventing "affordability products" proves that the tail was wagging the dog. A huge number of people could not afford to buy homes except through exotic, toxic financing, and that's why they took it. It wasn't a matter of choosing these because they were cheaper or more convenient than conforming, 30-year mortgages. It was the only way people could buy more than they could afford.

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#3) On December 12, 2007 at 10:59 AM, gopirque (54.20) wrote:

Well stated

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#4) On December 12, 2007 at 1:12 PM, Persuter (59.81) wrote:

Bent, I don't even get the logical connection you're trying to make. Yes, people believed that home prices would appreciate beyond all measure. Yes, lenders used that belief to sell them toxic ARMs which they could not possibly afford. Yes, banks unethically packaged extremely questionable loans as high-grade investments. Yes, homebuilders used this froth to build millions of houses on spec which would never get sold.

But what does ANY of this have to do with Greenspan? He was one member of a committee that voted to lower interest rates. ARMs allow people to buy loans that they cannot afford -- it doesn't matter how low or high the interest rate is. Low interest rates brought in more people, but if the lenders had simply followed the practices that they ALWAYS have in assessing risk, that wouldn't have been a problem. It was the lenders, banks, and homebuilders acting like pigs that got them in trouble.

If there was any fault in the government, it was for allowing these fiscally dubious business transactions to go on. But unfortunately, our government was too busy pulling down another four trillion in debt at a variable rate because of the low interest rates! Government by the people, eh? :)

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#5) On December 12, 2007 at 1:20 PM, Persuter (59.81) wrote:

Bent, I don't even get the logical connection you're trying to make. Yes, people believed that home prices would appreciate beyond all measure. Yes, lenders used that belief to sell them toxic ARMs which they could not possibly afford. Yes, banks unethically packaged extremely questionable loans as high-grade investments. Yes, homebuilders used this froth to build millions of houses on spec which would never get sold.

But what does ANY of this have to do with Greenspan? He was one member of a committee that voted to lower interest rates. ARMs allow people to buy loans that they cannot afford -- it doesn't matter how low or high the interest rate is. Low interest rates brought in more people, but if the lenders had simply followed the practices that they ALWAYS have in assessing risk, that wouldn't have been a problem. It was the lenders, banks, and homebuilders acting like pigs that got them in trouble.

If there was any fault in the government, it was for allowing these fiscally dubious business transactions to go on. But unfortunately, our government was too busy pulling down another four trillion in debt at a variable rate because of the low interest rates! Government by the people, eh? :)

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#6) On December 12, 2007 at 1:46 PM, TMFBent (99.85) wrote:

The connection is simple: Greenspan doesn't just handle interest rates. He sets policy and can use his pulpit as well. If he had simply told congress they needed to look at the way monetary policy had unleashed an avalanche, I believe the very threat of scrutiny alone would have been enough to reel in the worst of the excesses that got us where we are.

Of course, everyone in congress is living off Wall Street money, so it would have been tough sledding. But what Al did, instead, was encourage people to borrow more on their bubble equity.

Now that the terrible consequences of his original overreaction and eventual inaction are clear, he should at least have the guts to come clean. But he's got too much pride for that. He'll go to his grave trying to shore up his mythology. History, I believe, will judge him harshly.

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#7) On December 12, 2007 at 2:24 PM, Persuter (59.81) wrote:

Oh please. Right, Alan Greenspan just needed to tell everyone, "Hey, you're being crazy," and everyone would have listened! Because that totally worked during the stock market bubble!

 It's not like Alan has ten times more brains than everyone else put together -- it is fundamentally not his job to monitor home lending practices, and to claim it is is quite simply ridiculous. This is like blaming Social Security for con men. The lenders who loaned these ridiculous loans, the banks who accepted the undervalued risk, and the people who bought these ARMs knowing full well that the interest rates would reset, are to blame. The best you can come up with is that Greenspan should have been more vocal about credit, but EVERYONE is guilty on that one. To call him the architect of the bubble is silly.

Oh yeah, and P.S., if the worst thing Alan Greenspan did in his tenure as Fed chief was not be incredibly vocal about stopping a real estate crunch, I'm not sure that's something to judge him particularly harshly on anyway. I think people won't even remember this bubble next to the tech bubble.

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#8) On December 12, 2007 at 4:11 PM, SemperGumby77 (72.99) wrote:

Oh, I think people will remember this bubble, Persuter.

But I am apt to agree with you that I'm not willing to place the fault entirely at his feet. There probably should have been regulations put in place to monitor lending practices. Perhaps he wasn't a vocal enough advocate for this, but there was alot of blame to go around on that account.

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#9) On December 13, 2007 at 4:45 AM, saunafool (98.67) wrote:

Over the next 5 years or so, we'll see how this bubble stacks up to the tech bubble.

Where Greenspan is culpable is that he is the one who created the flood of liquidity that allowed it to happen, even going as far in 2004/2005 to encourage the use of adjustable rate mortgages. He was frequently asked about the "housing bubble" in his final year or two as Fed Chairman and stuck to his line that "we can only see bubbles in hindsight," or worse yet, parroting the NAR (in Greenspan Speak), "housing as an asset class is unlikely to experience irrational pricing behaviour because people live in their homes." In other words, he was telling people, "go ahead and buy, take advantage of these great financial innovations that give you a low interest rate to make housing 'affordable' for the first few years, and don't worry because housing never goes down."

While he was saying these things, he must have been ignoring the huge spike in "investment" properties, cable TV shows about "flipping" houses, and all the talk at cocktail parties about how everyone was getting rich from their home--all signs of a bubble.

Entirely Greenspan's fault? No, but his story that he couldn't have possibly known what was going on doesn't hold much water. Nor does his claim that had he known, there was nothing he could do anyway. He could have gone to the bully pulpit and pushed enforcement of lending regulations, could have warned people of the risk in buying into an overpriced asset class, could have cut the spigot of easy money which he directly controlled. Instead, he pretends that everyone was oblivious to what was going on except for a few obscure and mentally disturbed bloggers.

The reason the housing bubble will be remembered long after the tech bubble has been forgotten is that the tech bubble wiped out billions of investor money, lots of it from venture funds and such. When it collapsed, it had almost no impact on consumers. The collapse of the housing bubble is going to hit main street much more severely as more and more people realize that the ATM in the bedroom no longer dispenses cash. Now it demands that they put the money back in. Stupid ATM.

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#10) On December 13, 2007 at 9:22 AM, HKendrick (< 20) wrote:

Word, sauna.  Word.

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