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It May be April, but Greenspan's not Fooling Me

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April 07, 2008 – Comments (1)

Without getting into a debate about the merits of Keynesian economics and whether the Federal Reserve should have lowered rates to combat a recession, the fact is that under Alan Greenspan's watch the did Fed lower interest rates to an extremely low level for a longer than necessary period of time and then subsequently turned around and yanked the rug out from under everyone by engaging on a massive, rapid rate raising campaign (see my earlier rant on the subject here: Ben's Getting a Bum Rap, Blame Greenspan). I don't see how anyone can dispute that the low interest rates that the Federal Reserve provided helped to inflate the housing bubble.  Sure they were not the only cause, the loose lending standards that banks and brokers who were able to quickly turn around and securitize terrible loans to get them off of their books and the Wall Street machine that kept eating this terrible paper up are as much to blame as the Fed.  There's plenty of blame to go around.  But Greenspan cannot remain blameless. 

Not only did the Fed help to create the housing bubble by leaving interest rates too low for too long, but they compounded the problem by raising rates too rapidly afterwards.  Rather than pricking the housing bubble with a pin so that it could slowly deflate by gradually easing interest rates higher the Fed went on a massive rate raising campaign which essentially took a bazooka to the bubble when all of the newly popular ARMs and started to reset.  The bottom line here is that Alan Greenspan was a major contributor to the situation that we currently find ourselves in and he doesn't even have the courage to say something along the lines of "we were wrong."  Instead he keeps denying that he made any mistakes along the way, blaming banks and investors for the entire situation, and citing all sorts of arcane statistics and studies in his denial that low interest rates played any role in the creation of the problem.  Take a look at the recent piece that Alan Greenspan wrote in the Financial Times on the subject:

Alan Greenspan: A response to my critics

Yuck.

Deej

1 Comments – Post Your Own

#1) On April 07, 2008 at 6:30 PM, nuf2bdangrus (< 20) wrote:

He will go down in history as the most egregious abuser of currency ever.  Every time we try to avoid normal and healthy recessions, we continue to force misallocation of goods and services, thus setting ourselves up for greater trouble.  When, I don't know.  But debt serviced GNP growth is a long term loser.

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