December 12, 2007

Fearing blame for the housing bubble and "very large losses" to come, Alan Greenspan tries to spin and justify his incompetence

What Greenspan fails to understand is it wasn't just his reckless lowering of interest rates to absurd levels and keeping them there for much too long. No, it was his unwillingness to do what was required of the Fed in regulating the out-of-control REIC, namely mortgage brokers, lenders and investment bankers.

And instead of talking about "froth", Greenspan could have stood up like a man and said "Good god folks, haven't you ever read Manias, Panics and Crashes? This housing bubble is the biggest financial fools game in human history and it's going to blow something fierce one day soon!"

Or something like that.

But here's Greenspan now, sensing correctly that he'll be blamed for this disaster. History will not be kind.

"After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own.

There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century.

The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities.

Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.


johnewing said...

Greenspan is a deceptive genius by nature.

Even his words about ARMs not making an outsized contribution to demand is deceptive, either by conscious thought or otherwise.

The important question is the impact on home prices, and as any economist knows: increased demand at the margin can result in significant impact on prices. This is what happened so Greenspan may be technically right but not answering the important question which is impact on price.

In the end, Greenspan is just another human being that, over time, became intoxicated with his power. Ultimately his policies became arrogant and misguided, and now he can't stand the idea that he he will maintain the delusion until he dies.

In the meantime Bernanke has to try to keep Greenspans mess from getting alot worse.....He probably can't avoid the pain that is coming, but he could engage in Greenspanesque stupidity which might further delay the washout that we should rightly have suffered after the dot com boom.

Greenspan has a fine mind, but could not escape arrogance and hubris that comes with too much power.


westwest888 said...


Freddie is trying to get an accounting exception from the SEC. As I understand it, they already don't play by the GAAP book. That's why they don't know how much money they don't have. Then there's this nugget:

"One proposed change involves the Freddie-guaranteed mortgage securities that the company holds on its own books as long-term investments. Currently, Freddie marks its obligations on those securities to the market value each quarter as if they were held by another party. Instead, Freddie wants to make provisions for expected credit losses on the securities, which it says would result in less volatile results. Mr. Piszel said in an interview last month that such a change would bring Freddie into line with Fannie's practice and would have reduced the $2 billion loss Freddie reported for the third quarter by about $600 million."

Oh, so if Freddie didn't need to following accounting rules it wouldn't have to report bad news. That's pretty straightforward. I mean, what's $6 trillion in mortgages between friends (FRE, FNM, FHLA)?

westwest888 said...

Freddie WSJ article.

Anonymous said...

After all is said and done, Greenspan tunrs out to be nothing more than another petty politician on slurping from the public trough for over half-a-century.

Just another ugly little book-writing shleppen with his own agenda...


Anonymous said...

Yes, they say deflation is hard to get out of. The classic problem is that as prices go down, Americans will realize that things will be cheaper in the future and will wait to spend... Think about that - Americans will wait to spend. Don't sound to likely to me.
I say deflation is only bad if you're in debt and have to pay back with dollars that are worth more.

Anonymous said...

No, it was his unwillingness to do what was required of the Fed in regulating the out-of-control REIC, namely mortgage brokers, lenders and investment bankers.

Do not forget dirty appraisors, also.

However, I do not think it is the role of the Fed to regulate the RE industry. That is what Congress and some divisions of the Executive branch is for.

Anonymous said...

The Third Reich had Paul Joseph Goebbels to run their propaganda machine. The United States has been honored to have had Greenspan and now Bernake for their economic information ministry. All cut from the same cloth. Repeat a lie long enough to the ignorant masses and it becomes truth.

Ella said...

Bubbles can be prevented. Provided that it is the policy of the central bank and the government.

Indeed the ECB's policy is to prevent bubbles and thus the debt/credit bubble in the EU is far less extensive then here. Their current losses are based upon the rot in ASCB, CDO's etc. that Paulson and his buddies sold to them backed by US real estate assets and other US debt.

Sugar Daddy(SD) Alan, deliberately set about to create bubbles as a very clever way of transferring the wealth from us to them, the uber rich.

During the creation of the bubble, based upon low risk premiums which were created by the Fed, SD Alan frequently proclaimed that a real estate bubble was impossible. He reasoned that all real estate was local and thus a bubble was impossible.

How can he now claim that a bubble can not be controlled when he could not even identify the bubble in the first place?

Unbelievable, and they continued to appoint and confirm him as Chairman. What were they thinking?

He is as unqualified now to speak on the economy as he was then to set Fed policy.

Anonymous said...

Alan Greenspan was a devotee of that nut case Ayn Rand. How many Ayn Rand fans do we have on HP?

Bitterrenter said...

That's what we get for allowing one old, supply-side republican Jew to run the country's finances for years. Now we have another one. Don't they realize what happened the last time they ran a country into the ground?

Clinton tried to appoint more liberals to the Fed but the republican Congress wouldn't let him.

Now enjoy what you republicans all voted for.

Anonymous said...

I wish Greenspan would roll over and die.

Good riddence...

FredE said...

It occurs to me now that Greenspan's popularity in the 90s was specifically his economic policies' apparent effect in *creating* or encouraging bubbles, from which people (who already had plenty of money to invest) could make piles -- but also which only those with strong boats were able to keep afloat.

Anonymous said...

Debtors' prisons and exile to islands for all criminals, including all the white collar crooked.

The professional class--those who never wanted to do genuine productive work like their grandfathers-- has really hurt this country. Too many layers of bull piled higher and deeper to finagle.

Basic bookkeeping and accounting sufficed for decades. etc. etc.

Anonymous said...

"After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own.

There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century.


There ALWAYS was something the Fed could have done, and had done for ages before Greenspan: the usual, prudent, rigorous regulation of private bank's capital reserves and underwriting standards.

You know, the thing that let the US have the most stable and honest mortgage market in the world (it is still rare in most countries to be able to get a 30 year *fixed* rate mortgage---an amazing achievement).

You don't have to kill the whole economy or raise rates to do that, you have to stop banks from being idiots in the pursuit of competitive profits. If they are all equally regulated, they'll grumble but be OK with it since none will have an advantage over the other.

The Fed does NOT have just one knob.

Just as the dot com bubble easily could have been stopped by Greenspan (I mean this literally by himself) without causing the recessoin if he had raised margin requirements on stocks in 1999, instead of jacking up rates in general.

Guess what? The Fed has had exactly those powers, bank underwriting (what else is a central bank supposed to be doing?) and margin requirements since the Depression.

That's not a coincidence.

That's because the reality of 1933 smacked the insane deregulatory nutbags upside the head.

The reality is that Greenspan was so deeply poisoned by his (and most of the GOP's) ideology so that he couldn't see the solutions even written in the Federal Reserve Act.

Anonymous said...

Pretty good diary on Bubbles' article over at dailykos today.

Anonymous said...

Aren't Greenspan and Bernanke just spokesman for the Fed? I mean, they don't really make the decisions behind the scenes. It's like blaming Dana Perino for the Bush Administration's (Corporation's) horrible policies. Sure, it takes an easily corruptible, spineless person to fill a position like Greenspan's and Bernanke's but laying the blame on them alone would be missing the bigger problem : The Fed and corrupt Wall Street financial institutions.

Anonymous said...

What were they thinking?

They were thinking, "Mmmm. This man will make us all obscenely wealthy!"

abb said...

Greenspan isn't incompetent. He's an opportunist. He fully understood the consequences of his actions. He did it to pursue his self interest. You have to admit, Greenspan had a pretty good life.

Anonymous said...

December 12, 2007 (LPAC)--Sen. Hillary Clinton's campaign put out a new statement on Dec. 11 reiterating her proposal for an across-the-board national moratorium on home foreclosures. Clinton is the only Presidential candidate to call for a complete halt to foreclosures--and some local Democratic leaders are echoing her call, along with the hundreds who have backed Lyndon LaRouche's proposed Homeowners and Bank Protection Act, which stops foreclosures and protects chartered banks from runs. But Clinton's "plan" is still not the kind of action which can bring a hyperinflationary bank panic under control, and save millions of homeowners their homes.

Clinton characterizes the Bush/Paulson plan: "The Bush plan is designed to help as few homeowners as possible.... The Bush plan excludes homeowners whose mortgages reset prior to January 2008.... It is intentionally designed to leave out the roughly 400,000 families whose mortgages are resetting this quarter."

"My plan," she says, "imposes an immediate across-the-board moratorium on foreclosures; an automatic, across-the-board rate freeze; and the requirement that servicers and lenders provide status reports on how many mortgages they are converting from designed-to-fail to designed-to-work." And $5 billion fund to help communities hit by foreclosure waves

area 51 said...

WTF, Dude is a couple years LATE! Why didn't he warn the whole world years ago???????

HPLOVER said...

Our culture is greedy. We listen to Greenspan because he said what we wanted to hear. We are under the illusion that we have "leaders" what we have our "expressors" of what our culture desires.

Anonymous said...

Greenspan could of raised the rates a lot more when he saw the market heating up . Greenspan might of raised the rates to slow in fear that it would spook the market . In spite of raising the rates ,the market heated up even more and went into overdrive because speculation was the driver of the market for 3 years .

abb said...

"Expressors" is right. We are ruled by the average of the herd.

Luckily (hopefully and desperately) I believe we are evolving a societal consciousness. A frontal lobe to govern these impulses.