August 05, 2007

Alan Greenspan, the doof who caused the housing bubble, after leaving office at least tried to make amends by telling you what was coming

I'll never understand why Greenspan did what he did. Why he panicked and lowered rates to 1%, then kept them too low for too long. And why he told people to get into adjustable rates right before he raised rates 17 straight times. Makes no sense. Unless there was money changing hands.

But here's the maestro in 2005, after realizing his housing bubble had spun hopelessly out of control. Read every word. Slowly. Then read them again. And again. And again.

In this case, he's 100% correct. 100%. And you should get ready. It's here.

And can we get that damn Presidential Medal of Freedom back? Every time I see this picture it makes me sick.

"Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent.

To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear.

Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices.

This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums

18 comments:

decaffeinated said...

.
.
And can we get that damn Presidential Medal of Freedom back? Every time I see this picture it makes me sick.

Oh, sure thing, Keith. Right after we get the Medal of Freedom back from Tenet.

keith said...

Search for a scapegoat finds Greenspan

WITH investors having lost the odd trillion in recent weeks, the hunt is on for a scapegoat. Washington pundits are not famous for their kindness to politicians, regulators and other out-of-power figures to whom they no longer crave access. So it should come as no surprise that Alan Greenspan has been nominated as the culprit, and that the process of chipping away at the pedestal on which he stands has begun.

The recent volatility in share prices, the tightening of credit that has made several proposed private-equity deals uneconomic, and the collapse of the sub-prime mortgage market and with it several hedge funds are all due to – you guessed it – the former chairman of the Federal Reserve Board.

The first attack on Greenspan was one of those indirect, by-implication-only assaults in which government officials specialise. William Poole, president of the Federal Reserve Bank of St Louis, used a speech to property professionals to unburden himself of some thoughts on the nonprime mortgage market.

That market, Poole pointed out, matters to the Fed because of the importance of the housing industry to the overall economy, and the Fed’s regulatory responsibility for banks and practices in the mortgage market. He therefore finds it “odd” that the Fed and lenders did not realise that low interest rates in the 2002-4 period could not be maintained. Yet sub-prime borrowers were encouraged to take out adjust-able-rate mortgages (ARMs), many of which are now in default as a result of higher interest rates, leaving a trail of foreclosures and creating chaos in the market for mort-gage-backed securities. For most of these players Poole has little sympathy. “This year’s markets punished mostly bad actors and/or poor lending practices . . . The market’s punishment of unsound financial arrangements has been swift, harsh and without prejudice,” he said.




http://business.timesonline.co.uk/tol/business/columnists/article2198062.ece

Anonymous said...

The end part where he states that history does is harsh after risk is not properly valued on the low side is a reference to the great depression and other like post mania panics, he just did not want to spook the markets.

I disagree about your assertion that he recommended that everyone go out and take a toxic loan. He was just as cryptic in his reference to the great depression in the quote you published in this quote as he was in that comment of his that you reference. The translation of the quote you referred to is as follows:

If you're in a position where you have, or will have before the ARM adjusts/explodes, a significant cash flow position then you would want to take out the ARM to get the tax deduction on the paltry interest rates being charged and use that cash to invest elsewhere, then when the bill comes do either refi to fixed or pay off the loan. But this is only for those with the cash not Joe/janesixpack, who will be crushed and screwed because s/he will not have the savvy and cashflow to pull it off in a way to benefit themselves financially.

Anonymous said...

AHM’s stock plunged 90% IN ONE DAY. Jittery investors are now bailing out at the first sign of a downturn. Wall Street has become a bundle of nerves and the problems in housing have only just begun. Inventory is still building, prices are falling and defaults are steadily rising; all the necessary components for a full-blown catastrophe.

Mark in San Diego said...

Of course BUSH gave Greenspan the Medal of Freedom. . .he made serfs of millions. . .in keeping with the Bush/Cheney agenda - keep em poor, keep em dumb, dope them up with religion, and keep em voting against their best interests. . . the American way.

Anonymous said...

The excessive lowering of the risk premium engineerind by low rates was in fact of great value as an alternitive infusion of money supply immediately after 9/11. The problem was no one was sober enough to remove the punch bowl during the party and the banking risk tolerance became the lowest common denominator to fund the raw greed and speculation.

A little morphine was all the situation required. The Fed created a generation of low rate junkies that now face cold turkey.

Angry for our children's sake! said...

After Bush won his first term (somewhat with the maestro's help), I believe Greenspan then knew the end of the dot.com bubble was coming and by lowering rates fast and furious he opened the doors for the extreme wealthy to have a place to go and recap their losses quickly and continue to feed their appetite for 15-18% returns. In turn the big money investors were in a very good mood to keep their political contributions going to Bush.

This low-interst rate climate also temporarily fueled housing to give the sheeple a feeling of wealth and consumer confidence (albeit a false one, but hey the plan worked) which was good for votes and poll numbers, and a great opportunity for the mortgage companies, credit card companies, and realtors to also make a bundle and feel very generous about their political contributions too! And it is no accident that the bankruptcy law written as it was went thru when it did.

I also believe Greenspan's ultimte reason for keeping rates low was to pave the way for the Bush Admin to have back-door ways to help fund the Iraq war by selling Treasuries with artificially inflated values to foreign investors, who being greedy enough to trust the Bush administration bought into it all the non-sense of low risk. Not to mention the MBS's that were artificially rated as low risk by Moody's and the like when Greenspan and the rest of the Fed knew that wasn't true. Now as all HPer's know, the house of cards will fall.

I believe Greenspan was playing 100% on his political ideologies and "BIG BUSINESS" instead of what was right for the American economy. He sold his countymen (DEMOCRAT & REPUBLICAN) down the river for Big Business and the war machine. May he burn in hell. And as a woman, I'll never understand how Andrea Mitchell, who I believe also knows what he has done, could ever stay with him. To me that would be like sleeping with Hitler.

Anonymous said...

"I'll never understand why Greenspan did what he did."
Would YOU dare to stand in the path
of the Decider ?

Bitter Renter said...

How many of you voted republican in the past few decades? Greenspan was a republican, you know. Clinton tried to install some more liberal people to the Fed but was stopped by the republican Congress.

This country, this culture and the people deserve all the pain they're about to receive. Here's hoping the collapse comes swiftly so we can kill the richest cheerleaders for the system of exploitation that led us here. Then maybe we can create a more humane system of socialism.

I know I'll enjoy watching the carnage.

Anonymous said...

We gave the medal of honor to BIG BUSINESS! OMG!

k.w. - southern ca. said...

Well, I wouldn't go so far as saying "you'll enjoy the carnage" ... the country as a whole will be impacted by the housing crisis fall-out.

However, I do agree with you about a change within our government system.

What we have now just isn't working any longer.

~~~

Bitter Renter said...
How many of you voted republican in the past few decades? Greenspan was a republican, you know. Clinton tried to install some more liberal people to the Fed but was stopped by the republican Congress.

This country, this culture and the people deserve all the pain they're about to receive. Here's hoping the collapse comes swiftly so we can kill the richest cheerleaders for the system of exploitation that led us here. Then maybe we can create a more humane system of socialism.

Anonymous said...

Wow how ironic! Just hours before the Titanic sunk, the Captain was heard at the dining table to have said, "More Ice"!

Anonymous said...

bitter renter you are a tool

that is all

Bitter Renter said...

Dear Brave Anonymous person:

If you voted republican and were a cheerleader for the savage capitalism we endure, it is you who are a tool.

That's why I'll be enjoying watching people suffer knowing full well that at least 50% of them voted republican and deserve all the pain they can be given.

PablitoRun said...

I always have thought people have been too harsh in regards to Alan's comments regarding Adjustable Rate Mortgates. His whole basis for making that statement was that an American on average stays in their home WAAAY less than 30 years, and less even than the term of the 5 year ARM. Thus it makes no sense to pay the premium for locked in rates. Of course with inverted yield curves that premium no longer even exists.

brlsp said...

Keith, this is good topic, can you keep this post and commentary going too like you did for the Cramer one???

Anonymous said...

>>>I'll never understand why Greenspan did what he did. Why he panicked and lowered rates to 1%, then kept them too low for too long. And why he told people to get into adjustable rates right before he raised rates 17 straight times. Makes no sense. Unless there was money changing hands.<<<


simple. he did it because he was told to do it.

Anonymous said...

>>>Then maybe we can create a more humane system of socialism.<<<

on come now. are you naive enough to think you matter in this coming world? they don't care about you or any of us. they never have either. parties make no difference. they are all cheapy bought and sold by people who you don't see or know. this is the way it has been for 200 years perhaps. parties is simply a surface effect. to find the keys to all of this, look below the surface. see what is there?