Greenspan’s Denial
Since I’ve been critical of the unstable monetary policy of Greenspan, Bernanke and the Fed for many years, I can’t help myself but to respond to Greenspan’s editorial today in the Wall St Journal, where he pleads ‘not guilty’ for causing the housing bubble. His main thesis being that since he only controlled the fed funds rate, he had little influence on longer term rates which are directly correlated to mortgage rates and it was the “decline in long term interest rates across a wide spectrum of countries” that was the “most likely major cause of…the global housing price bubble.” He specifically points out ‘global’ to further distance himself from what the Fed specifically did.
What the Fed did under his stewardship and with great influence from Bernanke in response to the 2001-2002 recession was cut rates from 6.5% in Dec ’00 to 1% in June ’03 and left them there for one year even as the economy was averaging 4% growth (including 7.5% in Q3 ’03 alone) before raising rates in June ’04 to 5.25% over time through June ’06. The 1% rate was predicated on the belief that deflationary pressures were strong and thus gave the Fed leeway to be extremely accommodative with its policy. This deflation forecast which reached its pinnacle in mid ’03 was in the face of the CRB index having already rallied by 26% off its Oct ’01 lows. The 10 yr bond yield began its fall in Dec ’00 from over 5% to a low of 3.17% in June ’03 and the average 30 year mortgage rate fell from over 7% to below 5%. It was this that set the stage for the housing bubble in addition to the artificially low rates that penalized savings and resulted in an unprecedented binge of US spending that perpetuated the boom and enhanced the wealth effect that further exaggerated the bubble.
Lever up was Greenspan’s goal for the rest of us.
The more goods Americans bought from overseas where the US trade deficit exploded, the more foreign money was parked in US Treasuries. In addition, Greenspan’s debasement of the US$ with his rate cuts in combination with the export led growth in China, India, etc.., where the US consumer became 20% of global GDP, led to the rise in commodity prices which buoyed all commodity producing nations, who then parked more money in US Treasuries, thus keeping a lid on longer term interest rates even in the face of the Fed raising rates beginning in June ’04 and thus giving the housing market further rope. Foreign holdings of US Treasuries rose 21% in ’04 and 23% in ’05.
The point being is that the seeds of the bubble were planted way before the extremes in ’06 and ’07 and longer term rates remained contained due to the ‘savings glut’ that the US consumer helped to put in the hands of overseas investors through more borrowing and spending who in turn parked it back in the US. The global search for yield began with artificially low short term rates induced by the Fed and resulted in a massive misallocation of capital through more and more risk and higher and higher leverage that of course blew up and foreign banks and consumers couldn’t help themselves either as trade and credit became more globalized. With credit (booze) free flowing, many abused it and did stupid things but it was Greenspan and Co that brought the excess credit (booze) to the party.
>
Source:
The Fed Didn’t Cause the Housing Bubble
ALAN GREENSPAN
WSJ, MARCH 11, 2009
http://online.wsj.com/article/SB123672965066989281.html
March 11th, 2009 at 2:02 pm
The collective ass-covering by the elites who helped get us into this mess continues. What else would anyone expect?
March 11th, 2009 at 2:13 pm
don’t forget that NINJA and neg-am loans were not created by Fed-regulated institutions, but by impersonal and unpredictable “global forces.”
March 11th, 2009 at 2:19 pm
Funny but Greenspan fails to mention that Fed governor Edward Gramlich tried several times to propose tighter regulation/oversight of the mortgage industry by the Fed but Greenie ignored him because of his supposed belief that it be best left to the “free markets”.
Think I’m going to cancel my subscription to the WSJ when it runs out in May. They’re part of the problem too.
March 11th, 2009 at 2:19 pm
Anyone who can’t see that Greenspan’s handling of interest rates during his tenure is the number one reason we are in this mess is clearly looking through mind-numbing glasses.
And let us not forget that what Greenspan did is GOVERNMENT REGULATION of the economy. All those who are stating that the number one reason we are in this mess is LACK of government regulation by the Bush administration are wrong.
Clearly, the Federal Government through the Federal Reserve was OVER REGULATING the econony through its incessant and ridiculous pushing and then keeping interest rates way too low for too long. Therefore, GOVERNMENT REGULATION is the number one reason for this mess.
March 11th, 2009 at 2:21 pm
@Brett: So “overregulation” of the mortgage industry contributed to this mess? You ARE kidding, right?
March 11th, 2009 at 2:25 pm
@Mannwich: Didn’t even come to saying that “overregulation” of the mortgage industry contributed to this mess. ALL I said was that the NUMBER ONE reason for this mess was Greenspan. Lack of government regulation in other departments certainly contributed to this mess BIG TIME. But still don’t think lack of such regulation was number one in responsibility for this mess……Greenspan was and is.
March 11th, 2009 at 2:25 pm
Gosh, who knew that pushing on the gas pedal would make the car lurch???? Damn fuel injectors… mutter, mutter….
March 11th, 2009 at 2:29 pm
@Brett: Gotcha, and I agree. It’s not the number one reason. There were many, many contributors to this mess but the “Wild West” mentality by the mortgage industry was at least in the top 5.
March 11th, 2009 at 2:37 pm
If we continue to have to fight revisionist history, how can we develop workable solutions an d allow for the average person to understand the problem?
March 11th, 2009 at 2:41 pm
They basically had two options:
The first option was to level with the American people that “free trade” and globalism had kneecapped the American Middle Class.
The second option was to paper over that reality with debt.
They chose option two, but only because The People let them do it.
Now things are worse.
March 11th, 2009 at 2:44 pm
Well, larster, I think you’ve hit on it. Why does the WSJ enable this kind of crap? It’s along the lines of why the WSJ keeps the fires stoked around how this all was caused by the CRA, Fannie/Freddie, et al. By keeping people ignorant and by blaming the ills of the economy on the people who don’t have the money, they keep themselves entrenched.
Pitchforks and torches, baby.
March 11th, 2009 at 2:46 pm
Like I said in the previous thread, for this reason and other obvious ones (Whammer & larster), I will not be renewing my WSJ subscription when it expires in May.
March 11th, 2009 at 3:00 pm
What Al needs to explain then; is what HE would have done differently had he known that his understanding of market fundamentalism was flawed. Since he has admitted that, what exactly would he have done differently?
March 11th, 2009 at 3:03 pm
A central point of the article is the apparently changed relationship (or lack thereof) between short and long term interest rates. What I find troubling is the simplistic atribution of this change to progress in China, the so-called “savings glut”, and the notion that this is outside the scope of monetary policy.
The savings glut theory has merit, but there’s more to the story. Negative real short term rates in 2003 didn’t have the expected impact of stimulating measured inflation in short duration assets (essentially consumption goods), but clearly did stimulate inflation in longer duration assets. The missing link was the rapid expansion of non-bank adoption of what has traditionally been the role of banks; the capture of net interest margin by borrowing short and lending long. Excess short term liquidity enabled inflation in long term debt and long duration assets. Growth in securitization, the “savings glut”, and so on only describe the transmission mechanism. The driving force was liquidity.
March 11th, 2009 at 3:06 pm
http://ravibatra.com/globalfinancialcrisis.htm: ” The Global Financial Crisis: What Caused it, Where it is heading? by Ravi Batra
Batra’s book- ‘Greenspan’s Fraud’ on the evil Allan Greenscam is a must-read. Greenscam is the man who single-handedly destroyed America with his bizarre thinking you can build prosperity by increasing debt.
Now Americans can see how they have been impoverished for generations to come.
Incidentally after Greenscam left the Fed, he went to work for a firm (Paulson?) that was betting on the collapse of the housing market. The firm made billions on its bets.
This is how this evil creep benefited first by inflating the assets bubbles on the upside and then working for scums on the downside.
Here are a few gems from from Batra posted in the above link:
According to Batra, Greenscam when he turned 65 also began collecting his Social Security payments even though he was receiving a fat salary with perks as Fed Chairman.
“…. Once productivity outpaces the real wage and debt fills the supply-demand gap, company profits skyrocket, because the entire fruit of rising productivity goes to capital income. However, these are debt-supported profits, because without this debt goods will be unsold and profits will fail to materialize. With rocketing profits come rocketing share prices, so everybody becomes happy and begins to dance. This is how Greenspan won the world’s adulation, and no one looked at the magical role played by debt…”
“… Somehow Greenspan loves bubbles. As the stock market plummeted in 2000, he panicked and slashed interest rates to depths that had not been seen since the depression of the 1930s. He knew consumer demand was inadequate but did not attribute it to the stagnant real wage. He would rather have the public spend money through borrowing than through higher salaries. Greenspan also encouraged people to use their home equity to secure loans and asked banks to lower their lending standards. The banks dutifully followed as they and their CEOs began to make bushels of money. Add to this his deregulation spree that freed banks to trade in the stock market, and bubbles started to emerge in home prices and credit markets. Soon the new bubbles bested even the dot.com balloon of the 1990s. Greenspan still had not realized that since debt cannot grow exponentially all bubbles burst in the end, and when they do the consequences are very painful…”
Is it too much to ask that this evil creep of a man be executed in front of a firing squad for impoverishing America to set an example?
March 11th, 2009 at 3:09 pm
…..What’s he going to say…..he can see his reputation is being totally destroyed so he looked around for a plausible alibi…..this is it……….It’s not going convince anyone however……His cheap money policy was one side of the rectangle that created this mess….the other three sides…….hands off regulation……too clever by half financiers creating risky products they didn’t understand……deficit spending by the Bush admin.
March 11th, 2009 at 3:13 pm
artificially low rates and easy credit got us into this mess- now the target rate is zero and the fed is desperately trying get credit flowing- the reasoning is- if people could only get more credit then we could all get back on the hamster wheel and everything will be ok. Problem is, that anyone with any amount of sense is scaling back expenditures and saving. So . . . if the credit loosens up will people then rush to get financing? My guess is no.
March 11th, 2009 at 3:13 pm
Brett Tibbitts Says:
March 11th, 2009 at 2:19 pm
“And let us not forget that what Greenspan did is GOVERNMENT REGULATION of the economy.”
The Fed is an independent entity. From their web site:
“It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute.”
Clearly, lack of regulation and oversight by the Fed was part of this melt-down, but that’s not “government regulation” in the true sense. Lack of law enforcement (god, y’all knew I’d go there, eventually) was the primary cause then as well as being the reason the crime spree continues.
March 11th, 2009 at 3:16 pm
Nice bounce off 715. Let’s see where SPX closes.
March 11th, 2009 at 3:19 pm
fingers x’d on SSO calls @16, better odds than my crap luck at games of chance (to cover my cost basis :p)
(and _real_ longshot C calls @3 for apr 09.. They were cheapish, and I blew less money than folks I know would blow in a single poker hand..)
March 11th, 2009 at 3:24 pm
“… And let us not forget that what Greenspan did is GOVERNMENT REGULATION of the economy…”
That is called CENTRAL PLANNING when Greenscam fiddled with interest rates.
I think the morons at CNBC are now saying we are in a ’socialist’ state. Didn’t they realize that manipulating interest rates that were not set by the market or supply and demand is a form of central planning best suited to the former Soviet Union?
The morons at CNBC are late like Columbus.
There is one good thing. They never allowed Great-WalMart to turn itself into bank. At one point even Walmart thought it could earn higher profits from banking rather than retailing.
There will be no recovery in the US until all the excess debt and inventory from the dot.com and housing asset bubbles are flushed out of the system. Just look how long it is taking Japan to flush theirs out— and Japan had a budget surplus, strong manufacturing economy and high savings rates to help them weather their Depression. The US has none of that…
March 11th, 2009 at 3:26 pm
The WSJ has become the de facto location for an attempt at history revision by the people who got us here – Phil Gramm, Karl Rove, etc. And let us not forget the editor, media whore Steve Moore – the man has yet to find a television interview he can refuse. I failed to renew my subscription after Rupert bought it. They auto renewed me using my original CC and I had to call and “politely” request my money back – it was an unpleasant experience.
March 11th, 2009 at 3:29 pm
Long Term rates on mortgages went below 5% during his reign? How did I miss that refinance opportunity…The best I ever saw was 5.25. Oh well, thanks for that much, Mr. Bernanke.
March 11th, 2009 at 3:30 pm
@ Brett & Jeff
How about this, substituting MIS-REGULATING for OVER-REGULATING?
“Clearly, the Federal Government through the Federal Reserve was MIS-REGULATING the econony through its incessant and ridiculous pushing and then keeping interest rates way too low for too long.
March 11th, 2009 at 3:33 pm
Your whole argument is based on the flawed presumption that the Fed’s target rate is a relevant parameter for determining market interest rates, inflation and economic growth. I don’t think there is any real understanding in the economic sciences what this major causal link between the Fed’s target rate and the other variables is supposed to be. (Talking about a “ripple effect” is not an explanation). The money pool directly affected by the Fed’s target rate, the excess reserves of the banks, is very small compared to the many trillions of loans in the books of the banks and the GDP of US-economy of about $14 trillion US-dollars. Additionally, US-economy is just a segment of a much larger capitalist world economy. Other factors in the world economy are much more important for the supply of credit and the demand for credit, and, in turn, market interest rates, than some target rates of central banks.
As for the data you use to support your argument. In your post, you suggest that the downward trend of the 30yr mortgage rate from year 2000 on was the effect of the lowered Fed’s target rate. However, if we look at the data,
http://mortgage-x.com/general/historical_rates.asp
they show that the 30yr mortgage rate started to move lower about 1/2 year before the target rate was cut in Dec. 2000. The correlation between the long-term rates and the Fed’s target rate is weak. According to the data, if at all, the Fed’s target rate rather seems to follow the direction of the long-term interest rates with a lag of a few months or, if the target rate changes independently, the long-term rates are barely influenced. Recent developments, since the recent major economic crisis started to unfold, also contradict the common belief that there was a close link between the Fed’s target rate and market interest rates. As if market interest rates have cared about the slashing of the target rate to effectively Zero. Even short-term market interest rates have shown their own mind, when credit got crunched.
The power of the Fed to control the US-economy as a segment of the world economy is way overrated by you and many others. I don’t believe in the ability of any government or institution to control capitalist world economy effectively and that systemic crisis could be avoided, if governments just found the right policies and regulative framework. If there were, why hasn’t found anyone those, since capitalism came to existence in Europe in the 16th century and since it spread all over the world? Capitalism, despite its great achievements regarding the development of productive forces and the ability to provide more and more goods for less and less costs, also leads to crisis and misery for many with necessity. Marx was right.
rc
March 11th, 2009 at 3:36 pm
@otto: I agree. It’s over for Greenie’s legacy no matter how much he tries to cover his ass now.
March 11th, 2009 at 3:41 pm
“Capitalism, despite its great achievements regarding the development of productive forces and the ability to provide more and more goods for less and less costs”
Less and less? How about costs not included, e.g., irreplaceable rain forests and their atmosphere-cleansing capacity or untold millions of tons of topsoil washed downstream? What kind of cost-price can/will be put on those?
March 11th, 2009 at 3:43 pm
leftback Says:
at 3:16 pm
Nice bounce off 715. Let’s see where SPX closes.
So…, taking the last 2 days gains off the table? or letting it ride into the end of the week?
March 11th, 2009 at 4:02 pm
Greenspan not only kept interest rates too low too long resulting in a real estate bubble, he fought any attempt to regulate the derivataive instruments, aka Weapons of Mass Financial Destruction per Buffett. Greenspan is a central player in the whole deregulation agenda that resulted/caused this economic melt down. In his book AGE OF TURBULENCE he talks long and often about his involvement with Ayn Rand the queen of objectivism which supports the idea of the evils of government interfering with the noble causes of the individual.
http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?_r=1&pagewanted=2
“It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade,” Mr. Greenspan writes. “The worst have failed; investors no longer fund them and are not likely to in the future.”
In his Georgetown speech, he entertained no talk of regulation, describing the financial turmoil as the failure of Wall Street to behave honorably.
“In a market system based on trust, reputation has a significant economic value,” Mr. Greenspan told the audience. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”
As the long-serving chairman of the Fed, the nation’s most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.
A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.”
Deregulation/lack of regulation/mis-regulation played a huge part in the current economic melt down, and Greenspan was one of the biggest proponents of this approach.
March 11th, 2009 at 4:06 pm
For me the WSJ is starting to look and sound more like USA today. G-Wiz there is even a sports section now. The front page articles that have nothing to do with the business have been eating at me. Editorial is half book pandering, half non sense. When people I have on filter are repeating verbatim WSJ op-ed’s I know it’s time to tune it out.
I’m wondering if they’ll let BR do an opinion piece for his book?
What is out there now. Just the FT?
March 11th, 2009 at 4:11 pm
Thanks Rootless, famera1 et al.
“In a market system based on trust, reputation has a significant economic value,” Mr. Greenspan told the audience. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”
That ‘we’ is likely an unintentional but certain use of the royal we. Well, we are not disabused.
A reputation must be maintained through real action, like a garden must be tended. Greenspan should have left the Fed much earlier and dedicated himself to other pursuits.
March 11th, 2009 at 4:12 pm
batmando,
Thank you for that post yesterday on the corporations, their crime encouraging limited liability and how the courts set it all up. THAT is the crux of the matter. It’s like questioning God to the likes of Greenspan and other greed worshipers. Tibbits must make a lot of money. He wasn’t slammed by Greenspan’s fica atttack in the eighties or that wonderous smackdown for middle to high middle class
taxpayers while the rich actually had their rates lowered during the Reagan rip-off (the middle tax bracket raising bulge). I was there and I haven’t forgotten. And let’s not forget that other fabulous fiction: “Income is one thing and capital gains is another”. How fucking convenient for those who don’t work for a living but live off capital gains. Oh, but those high and mighty capital gains recipients are the drivers of our economy because they are the ones who do the investing. Horseshit and lies! Greenspan and his like specialize in gaming us working stiffs and keeping the door to real wealth among the elite firmly closed. Tibbits, tell us how much of your INCOME is capital gains and how much is earned by actually working. We might even believe you don’t have a severe conflict of interest.
March 11th, 2009 at 4:24 pm
“Oh, but those high and mighty capital gains recipients are the drivers of our economy because they are the ones who do the investing. Horseshit and lies!”
I guess you just gave BR the working title for his next book. “Horsehit and Lies: A Guide to the Rentiers Jackassery”.
Paul Jones in a post under a previous topic noted that renting seeking isn’t a valuable as self-reliance, more or less… I fully agree.
It is clear upon sifting through the wreckage of the Madoff scandal that the investor class is not uniformly suited to the task of prudent investment and many were seduced by the siren song of a hustler who told them ‘having lots of money entitles you to even more money, it is just logic…’
Capital is not money, capital is an abstraction. Money is its precipitate.
March 11th, 2009 at 4:34 pm
“The driving force was liquidity.”
Bingo. And Greenspan can claim all he wants that short-term interest rates did not impact the prices of long-term assets, but it is very easy to understand why this is not true–the short-term rates fostered an incredible expansion (both by commercial and investment banks) in the carry trade–borrowing long to lend short–which, when the short-term money dried up because the long-term assets collateralizing it were proved to be crap, you got Bear Stearns, Lehman, AIG, et al, in the crapper, as suddenly reality reared its ugly head and nobody wanted to lend them any more short-term dope for their long-term addiction.
March 11th, 2009 at 4:34 pm
Todd Says:
March 11th, 2009 at 4:06 pm
What is out there now. Just the FT?
……..I switched to the FT about two months ago having taken the Journal for over forty years on and off….Wolfe had a superb oped piece on the economic crisis a couple of days ago…..I really think there is no one at the Journal who is capable of writing such a piece because they are so weighed down with supply side orthodoxy and political bias. I have to believe they have lost masses of circulation with all these banks slimming down but their numbers don’t show it…..Ergo I think Murdoch is lying……no surely not….The oped page has been nonsense for years but the reporting and finance focus was stellar but now we have politics, michelle’s biceps, and how the red sox did last night……They are destroying their Unique Selling Proposition.
March 11th, 2009 at 4:35 pm
er…”borrowing long to lend short”..s/b, of course, “borrowing short to lend long”
March 11th, 2009 at 4:41 pm
@Brett Tibbetts:
I agree with you…totally.
People can blame economic matters on this or the last or the last several presidents…but NO single individual has more blame than Greenspan.
March 11th, 2009 at 4:58 pm
http://theburningplatform.com/economy/grand-illusion—the-federal-reserve
Read the truth about Greenspan and the Federal Reserve
March 11th, 2009 at 5:22 pm
From the NYT via the Daily Dish blog:
The Looting of America’s Coffers
http://www.nytimes.com/2009/03/11/business/economy/11leonhardt.html?_r=3&ref=todayspaper
Perhaps of interest to some of the posters and readers of this blog.
March 11th, 2009 at 5:36 pm
How touchingly naive.
That 1% rate was predicated on one thing and one thing only … getting George W Bush re-elected in 2004.
C’mon Barry, this is embarrassing.
Forget how Greenspan was ‘liasing’ with live visits to the White House on an unprecedented weekly basis back then?
March 11th, 2009 at 5:40 pm
Greenspan certainly has been a major exponent in public who represents a certain believe system, call it ideology, how capitalism allegedly works (best). I guess he was put in this position as Fed chairman because he represented this believe system so well. However, attributing the crisis of world economy to the actions of one person as root cause means merely trying to find a scapegoat. Greenspan’s contribution was mostly ideological. Beside this contribution, the role of the Fed’s interest rates policy is way overrated like I already had argued in my previous comment.
My way of thinking is that the current economic crisis has its cause in an global over-accumulation of capital, which was reinforced by de-regulation in different countries in favor of income from ownership of capital after the failure of the Keynesian policies, since those lead to high inflation in the 70ies that strangled economic growth in the end. The primary goal of economic activity in capitalism is to accumulate more capital. Everything else is mean toward this goal. With de-regulation, more and more capital accumulated in the hands of capital owners who were looking for profitable investments. Since demand is always limited, additional demand must be created by credit to keep capitalist economy growing. This lead to a global credit bubble that started to build up in the 80ies with credit growth in excess of economic growth. Growing supply of credit lowered market interest rates enlarging the credit bubble. The housing bubble in various countries, which started in US in the second half of the 90ies, was a consequence of the credit bubble, but not the cause for the current economic crisis. Since interest payments which are promised with all the credit must come from somewhere, credit excess can’t grow infinitely. At some point interest promises won’t be fulfilled anymore, credit becomes foul. The trigger point was reached when houses stopped appreciating. The credit bubble cracked. A spiral of credit deflation started, global demand and world trade are collapsing now, world economy has gone into a major recession. The difference of this recession compared to the ones in the early 90ies and 2001/2002 seems to be that latter were embedded in the expansion phase of the credit cycle, whereas we seem to be in the finale phase of the credit cycle. For that reason, this recession is much more severe than the two before and will become even worse. Unless credit can be inflated again, postponing the inevitable outcome. But then the economic crisis will be even worse than the one now.
rc
March 11th, 2009 at 6:19 pm
“His main thesis being that since he only controlled the fed funds rate, he had little influence on longer term rates which are directly correlated to mortgage rates …”
The absurdity of this defence is obvious just by looking at the current Fed response (buying ABS, buying MBS, loaning cheap funds to buyers of these assets, etc. ad nauseum).
So during the pathetically obvious bubble, why was not the Fed short-selling ABS, MBS, and providing unlimited funding to bearish speculators so that they could remain solvent in the face of such nonsense? The whole system was rigged for updside and Greenspan was a despicable cheerleader and traitor when he should have been a prudent central banker!
March 11th, 2009 at 7:03 pm
Actually deflationary forces were gauged to be “remote.” But, they deliberately chose to leave policy accommodative until the “slack in labor resources” had been taken up. In 2003, we began a jobless recovery, a recovery which started roughly 18 months after the Q4 01 recession. Job growth did not show up in the BLS figures until Q2 2004.
That aside, Greenspan is flushing his credibility out the window. A few months back, he did take some ownership of the economic crisis he helped to precipitate. This latest denial of his role in the crisis is a retraction of the accountability he owned up to a few months back.
March 11th, 2009 at 7:58 pm
I refuse to exonerate Greenspan for many reasons. But his editorial in the WSJ today was largely in response to John Taylor’s explanation of the origins of the crisis, that placed most of the blame on a too low fed funds target rate in 2002-2005. I was following the fed funds rate closely during that time and thought that according to a foreward looking Taylor Rule (I understand the irony) that Greenspan was dead on in his practice of monetary policy (there was a lot of slack in the labor market throughout that period).
In the final analysis the biggest problem with John Taylor’s assertion is that the original cause of the financial crisis, the housing bubble, was already well inflated by the middle of 2001 before the fed funds target rate fell below 4%. Between mid-1997 and mid-2001 the US national Shiller index had risen 18% in real terms and 36% in nominal terms. This was unusual since real housing prices had stayed in a narrow band throughout the postwar period prior to that. Thus a low fed funds rate could not have been the primal cause.
If I had to pick a primal cause (I know that many factors contributed, and I agree with Menzie Chinn’s assertion that it was a toxic mix of policy failure) I would pick the Taxpayer Relief Act of 1997. That was the very year that the housing bubble started to inflate. The Taxpayer Relief Act lowered capital gains tax rates and dramatically increased the amount of excludable real estate capital gains. More importantly it extended most of the tax deductions and credits that had previously only been given to primary residences to second homes. It fits the timing better than any other policy change made.
I suspect that it has been ignored mostly for ideological/partisan reasons (this applies to most economists as well). The right is too busy trying to pin the blame on policies designed to make homeownership more affordable. The left is too busy trying to pin the blame on deregulation. I have come to the conclusion that the original cause was a bipartisan tax act that provided huge tax incentives for the upper middle class to engage in speculative rela estate investments.
March 11th, 2009 at 8:48 pm
@Mark S: I totally agree with you that the taxpayer relief act has had a huge impact as well. Why is the government providing a direct subsidy to homeowners and favoring this group over renters or any other? The more I think about it, the more I realize the current tax code simply needs to be scrapped and replaced with something much simpler that is more loophole-proof. Of course, the tax accounting lobby won’t like that at all. If the tax code were simple, their business would be done for.
March 11th, 2009 at 9:13 pm
MRegan Says:
March 11th, 2009 at 5:22 pm
From the NYT via the Daily Dish blog:
The Looting of America’s Coffers
http://www.nytimes.com/2009/03/11/business/economy/11leonhardt.html?_r=3&ref=todayspaper
Perhaps of interest to some of the posters and readers of this blog.
MR,
that art. is not only well wrirrwn, but spot-on..
the idea that any of this–what we’ve recently been entreated to– is de novo, is an idea lifted straight from a Handbook endorsed by Bernays, not *Reality.
this update of Economy Ramp’nCrash v2.0 has been in Beta-testing for many moon..
March 11th, 2009 at 10:33 pm
WSJ | /de/null
March 11th, 2009 at 10:38 pm
I meant /dev/null of course.
By the way, it is worth repeating to all you Microsofties out there that Linux is free and it rules.
Try it in the Debian flavour, or the Ubuntu flavour, or the Gentoo one, or any other, but TRY IT.
Before dumping that old hardware, download a free CD iso image, burn it, boot it and enjoy.
March 11th, 2009 at 10:56 pm
As my wife says about Greenspan… “Well, at least he has his looks”
March 11th, 2009 at 11:21 pm
Let’s not forget the moron GWB touting “an ownership society” in one State of the Union address.
March 12th, 2009 at 12:10 am
Greenspan’s really stretching to save himself here. His argument is basically I didn’t create the crisis I created the environment that created the crisis.
http://which-ways-up.com/2009/03/alan-greenspan-attempts-to-cover-own-ass/
March 12th, 2009 at 8:40 am
@rootless_cosmopolitan: (March 11th, 2009 at 3:33 pm)
How about ARMs? Initial low interest tracks the short term rate quite closely. Most of the speculation
in residential real estate was with 1/5 year ARM.
March 12th, 2009 at 1:23 pm
What Greenspan and the other neoconomist clowns failed to realize is that the only sustainable economic growth, comes from growing the income of the consumer class. That is the reason that semi-socialist economies like the Scandinavians have been so increadibly successful. At times those countries had the unions run the (democratically elected) government. That ensured that most benfits of increased productivity were distributed to the consumer class and, therefore, had the maximum effect on pushing further economic growth. Everybody is a winner as long as nobody gets to gready. Or use the south American model, and have a few gazillionaires and a small economy with a huge mass of poor people. It’s time to choose which fork in the road we want to go down, I say let’s get out the pitchforks.
March 14th, 2009 at 2:37 pm
Boockvar writes “Foreign holdings of US Treasuries rose 21% in ’04 and 23% in ’05.” But according to Data360 (http://www.data360.org/dsg.aspx?Data_Set_Group_Id=272) these appear to be the abosolute values; in other words it should read “Foreign holdings of US Treasuries rose TO 21% in ’04 and 23% in ’05.” Perhaps a small typo but it seems to make a big difference in meaning.
Also, Greenspan writes, “Aside from the inappropriate use of short-term rates to explain the value of long-term assets…”, but at the time real estate was being traded on a more short-term basis, if I understand things correctly.