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Call to ARMs

Posted By Barry Ritholtz On June 24, 2006 @ 8:14 am In Federal Reserve,Inflation,Markets,Real Estate | Comments Disabled

Alan Abelson [1] hits on a favorite theme of ours: Bad financial advice given by a certain former Federal Reerve Chairman:

"ANYONE KNOW A GOOD LAWYER? Before you accuse us of cavalierly perpetrating an odious oxymoron, rest assured we’re using "good" in the sense of professional superiority, certainly not moral rectitude. And what inspires our request is we’re trying to prepare for a flood of requests from angry readers hot to sue Alan Greenspan.

Be assured as well that we would earnestly seek to discourage such action. For one thing, Mr. Greenspan is a well-meaning and gentle soul, known far and wide for his generosity (they don’t call him Accommodating Al for nothing). For another, as the New York Times reported last week, chasing ambulances is already a lavishly rewarding occupation. More so, for sure, than tending to the unfortunates being hauled to hospitals in those ambulances, as evidenced by a study that found lawyers’ incomes between 1995 and 2003 rose 7%, while your average sawbones over that same stretch suffered a 7% decline in his take-home pay.

But the incontrovertible if sad truth is that Mr. Greenspan did offer financial advice using, what’s more, the bully platform of a congressional hearing to make his pitch.

And the even sadder truth is that any innocent who chose to follow his advice is now the poorer for having done so. That Mr. Greenspan has recently received a huge advance for a book on his life and happy times as a famous economist and revered civil servant is, alas, a cinch to only whet already ravenous litigious appetites.

More specifically, Mr. G stands guilty of committing a capital crime several years back by regaling the peasants, who considered his every word a divine utterance, on the joys of adjustable-rate mortgages (as opposed to the old stodgy fixed-rate variety).

As it happened, he couldn’t have picked a worse moment to make what Stephanie Pomboy of MacroMavens nicely dubs his "call to ARMs." Yields were their lowest in 40 years, but poised to begin a remorseless climb up the slippery slope.

The masses who rushed to follow the master’s advice are only now starting to feel the pain of their folly. Stephanie reckons that some $1 trillion of adjustable-rate mortgages are due to be reset this year and another $1.7 trillion next. In the event, legions of homeowners will have to cough up 25% more every month and, for some, the bite will be as much as 60% greater…

Note that we made the same observation (in 2004 [2]) about this horrific advice.  Back to Abelson:

Much as we sympathize with their plight, the hapless borrowers have only themselves to blame for failing to perform sufficient due diligence before acting on Mr. G’s urgings. Had they made even a cursory effort to take his measure, they would have known better. For though not always wrong on his projections or wildly off on his timing (he isn’t, after all, a financial journalist), he invariably has been wrong on the big ones. The only thing worse than his misdiagnoses have been his proposed remedies, which consisted mostly of the same old snake oil of easy money and easier credit. He was always ready with a fix, never with a cure.

Most notably, he lost his nerve when confronted by a runaway stock market and what to do about it. His politically correct but economically inane answer was essentially…nothing. When equities inevitably came back to earth with a horrible thud, he sought to distract us simple folk from the smoking ruins by creating the greatest housing bubble since shelter-seeking man first crawled out of his dank cave.

Now, that bubble’s losing air rapidly and bad stuff is beginning to happen. Mr. Greenspan has fortuitously or craftily — or both — slipped out of the line of fire and, presumably, is busily scribbling away, offering, as the key player, his priceless perspective on the great bull markets in stocks and houses. (The perspective may be priceless but, the book will probably, depending on length, go for close to 30 bucks a copy, with the usual discount at Barnes & Noble.) We can hardly wait to read his account. But, then, we’re a real sucker for anything with a financial theme, especially fiction."

We couldn’t agree more — we have hit upon quite similar themes several times. First, in Ignore the Cheerleader-in-Chief [3] (If no RM, see this [2]) and more recently, in Myths of the Greenspan Era [4].

Consider the following fed chief foibles which w ehave pointed out in the pas [2]t:

• October 8, 2004 "The impact of the current surge in oil prices, though noticeable, is
likely to prove less consequential to economic growth and inflation
than in the 1970s." 
-Speech to National Italian American Foundation in Wash, D.C., Federal Reserve Chairman Alan Greenspan said he’s not worried by the rise of crude oil prices to a record $55 a barrel.

• July 20, 2004: Rising energy prices "should prove short-lived"; crude prices have risen nearly doubled since then.
-Testimony before Congress

• May 2003, Greenspan warned of potential Natural gas shortages; prices tumbled shortly thereafter on increased supplies.

• Summer 2004: His advice to would-be home owners, praising the virtues of adjustable-rate mortgages when fixed-rate loans were near half-century lows.

These are but a few of his calls; If you see a pattern, give yourself a gold star . . . or better yet, just buy some gold, as his easy money policies are the reasont he metal has doubled over the past 5 years.



Call to ARMs [1]
Alan Abelson
Barron’s MONDAY, JUNE 26, 2006   

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/06/call-to-arms/

URLs in this post:

[1] Alan Abelson: http://online.barrons.com/article/SB115110348487989476.html

[2] in 2004: http://bigpicture.typepad.com/comments/2004/10/new_column_up_a_1.html

[3] Ignore the Cheerleader-in-Chief: http://www.thestreet.com/p/_rms/rmoney/barryritholtz/10188266.html

[4] Myths of the Greenspan Era: http://www.thestreet.com/_rms/markets/economics/10265345.html

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