As noted last night, Alan Greenspan has blamed the crisis on a lack of regulation rather than ultra-low rates. (You can find his Brookings institute paper The Crisis here).

While the lack of regulatory enforcement — ironically, mostly notably by the Greenspan Fed — was no doubt a large part of the problem, his exoneration of ultra low rates is belied by history.

I detail all of this elsewhere; but perhaps the impact of low rates would be more easily understandable to the Maestro if we put it into numerical bullet point form:

1. Starting in January 2001, the FOMC began lowering rates, eventually to 1%. They kept rates below 2% for 36 months, and at 1% for over a year. This was unprecedented.

2. While these rates had myriad effects, lets focus on just two: The impact on Housing, and on global bond managers.

3. Since homes are (typically) a leveraged credit purchase, lowering the cost of that credit has an inverse effect on prices — i.e., cheaper mortgages = more expensive houses. Since most people budget monthly, carrying costs are more important than actual purchase prices. Hence, a big drop in interest rates can cause a spike in home prices, with monthly payments remaining fairly similar.

Bottom line: Ultra low rates were the initial fuel sending home prices higher.

4. At the same time, bond managers were scrambling for yield. Pension funds, trusts, foundations require a certain annual gain, and without it, they have issues. Note that most of these managers by their own charters cannot purchase junk, they can only buy investment grade paper.

5. Wall Street had been securitizing collateralized debt for years. They turned credit cards, student loans, auto financing, and of course, mortgages into paper.

6. Making loans to people with weaker credit scores, lower incomes, or more debt was a risky proposition, and hence, generated higher yields for that risk. By collateralizing these subprime mortgages, Securitizers could generate higher yielding paper for the managers of bond funds. And because the rating agencies — Moody’s, S&P, and Fitch were totally corrupt — the securitizers could purchase AAA ratings. Hence, all manner of unqualified junk paper could be sold to these funds that were only allowed to purchase investment grade paper.

Here is the first point where lack of oversight comes in (vis-à-vis the ratings agencies). But we never would have gotten to that issue BUT FOR the ultra low rates.

7. The triple AAA rated junk paper sells well, increasing demand for more of it. Huge Wall Street demand for more junk to feed into the maw of the securitization beast compels all manner of non-bank lenders to issue even more sub-prime mortgages. And since they was a finite number of people who afford mortgages, they got creative with ways to make mortgages even cheaper. First came the 2/28 variable loans, with a cheap teaser rate the first two years.

Then came Interest Only (I/O), where there was no principal repayment.  I called these loans “Rent with an option to default.”  Lastly, we had the Negative Amortization (Neg/Am) mortgages, where the borrower paid less than the monthly interest charges, with the difference added to the principal owed. Hence, with each passing month, the mortgagee actually owed more on the house than the month before, rather than less. These loans defaulted in enormous numbers.

8. The lack of regulation of these non bank lenders was a key factor. Ironically, it was the Fed’s job to regulate them, and moving beyond irony to surreal absurdity, it was then Fed Chair Alan Greenspan who called these non bank lenders “innovators” and refused to regulate them. (This was around the same time, with rates at record low levels, when he was advising people go for variable mortgages). Their innovative business model was lend-to-sell-to-securitizers.

9. Numerous states had on their books anti-predatory lending laws. These made it illegal to make loans to people who could reasonably not afford them (nor could they charge usurious rates or excessive fees that would make defaults much more likely).

The Bush White House issued its doctrine of “Federal Pre-emption,” which essentially told the States to step out of the way of these lenders. The data shows that states with anti-predatory lending laws had much lower defaults and foreclosures than states that did not; the Federal Pre-emption significantly raised default rates in these states.

Hey, where were all those States right advocates back then? My Spidey-Sense is tingling! I suspect these new states rights people are not at all concerned with states rights at all, and are more likely little more than hypocritical partisans.

10. The lack of regulatory enforcement was a huge factor in allowing the credit bubble to inflate, and set the stage for the entire credit crisis. But it was intricately interwoven with the ultra low rates Alan Greenspan set as Fed Chair.

So while he is correct in pointing out that his own failures as a bank regulator are in part to blame, he needs to also recognize that his failures in setting monetary policy was also a major factor.

In other words, his incompetence as a regulator made his incompetence as a central banker even worse.


Class dismissed.

Category: Bailouts, Credit, Federal Reserve, Fixed Income/Interest Rates, Real Estate, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

65 Responses to “Explaining the Impact of Ultra-Low Rates to Greenspan”

  1. Marcus Aurelius says:

    Greenspan’s logic, reduced:

    The short term has no bearing on the long term. Just because I poisoned the community well last month doesn’t mean that all of the dead villagers you see lying around the well today are a result of what I did then. Once I put it into the well, it was no longer under my control.

  2. Marcus Aurelius says:


    Blame the poison, not the poisoner.

  3. liberal says:

    I agree that low rates will raise prices. And I agree that it could have “initiated” a feedback loop. But if you ask “how much did the decrease in rates contribute to increase in prices,” the answer is actually “not much.”

    I knew we were in a bubble long before most people, thanks to following Dean Baker’s blog. Dean looked at price/rent ratios, mainly. But I kept thinking, “what about lower rates?” Not that it meant that prices were justified, but if it was largely lower rates, then prices might not go down until rates went up.

    Then (because SWMBO wanted a house), in June 2008, I bought in a MD suburb of DC. So I was actually playing with mortgage tables. I applied this stuff to the housing bubble history I knew of. Locally, prices went up maybe 150% from 2000 to 2008. (Sorry—figures are pulled from memory.) Rates (I was using a very simple model—30 year fixed, with no down payment to make the math easy) went down from 8% to 6%. Crunching the numbers, that would translate into a 22% increase in prices (again, these numbers are IIRC), if your model assumes that a buyer just cares about monthly payments.

    So: while I agree that easy money was partly to blame, as an initiator and because of chasing yield as Barry mentions, I think the main culprits are (a) lack of sufficient regulation, (b) opaque financial products, (c) screwed up incentives, all the way from mortgage brokers to heads of investment banks. (Random annoyance: why the f*** don’t mortgage brokers have fiduciary responsibility towards their clients?)

  4. liberal says:

    Adding: by “contribute,” I mean “contribute directly.”

  5. ReturnFreeRisk says:

    This is Fed’s own paper. Greenspan has been disingenous about this for years. Anyone trading the long end of the treasury curve knows what the Fed did to the term premium. One day, I will go back, chart the intraday 10yr note yields, put FOMC decisions & Fed comments on it to show how the Fed actions were directly depressing 10yr and longer yields. Mr. Greenspan is looking for other explanations because he can not sleep at night knowing what he is responsible for. Predictability in fed policy is A MORAL HAZARD.
    From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25 percentage points, yet long-maturity yields and forward rates fell. We consider several possible explanations for this ” conundrum.” The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic uncertainty and financial market volatility, more predictable monetary policy, and the state of the business cycle.

  6. globaleyes says:

    WORST KEPT SECRET: Alan Greenspan will not be invited to Barry Ritholtz’s next birthday party…

  7. He’s welcome to come!

  8. “The Bush White House issued its doctrine of “Federal Pre-emption,” which essentially told the States to step out of the way of these lenders. The data shows that states with anti-predatory lending laws had much lower defaults and foreclosures than states that did not; the Federal Pre-emption significantly raised default rates in these states.”

    This thing was rigged to blow, from the top, down..the Episode was, truly, a feeding-frenzy, by Psychopaths and their followers, on the Body, and Body-Politic, of what was left of the, former, united States of America..

    differently, a Wholesale Asset-Stripmining operation that was cleared-”Green means Go!”-from the Highest Levels, to level the last bulwark of Freedom on the face of the Globe, the, formerly(?), American Middle Class.

    w/this: “4. At the same time, bond managers were scrambling for yield. Pension funds, trusts, foundations require a certain annual gain, and without it, they have issues. Note that most of these managers by their own charters cannot purchase junk, they can only buy investment grade paper.”

    it goes, little, reported that many of those Funds’ ‘Management’ was leased out to the, very, same IBanks that were producing the G*rbage that, coincidentally, were shoved into the Funds..

    past that, Who were these ‘Fund Managers’? How were they Paid? and, Why is there so little attention being paid to their Role in this Production?
    11. Central Banking is Central Planning.


    nice job on 1.-10. ~ though, w. 7. what’s the problem w/ I/O ‘s ? from a Financial POV, at the min., they are the least expensive option–maximizing Home Interest deduction Tax incentives, lowering negative Cash Flows, and if your OCC (opp. cost capital) is lower than the face rate on the Note, it’s a given, no?

  9. cognos says:


    For all those 1% rates, ALL that speculation in housing, and ALL that overbuilding.

    We didnt have 1 single bit of persistent inflation. In fact, we have net deflation. The crisis of 2008 was a DEFLATION crisis. What does that say about monetary policy?

    Therefore, the RIGHT TOOL was NOT higher rates. It was to regulate the downpayment (20-30%?) and fraudulent mortgages (deceptive sales practices, teaser rates, no prepayment penalties).

    Dont you see how that is actually correct? “Rates” are a blunt instrument that affect ALL of the economy. Many parts of the economy were actually under-invested in during housing boom. To have higher rates would’ve increased our deflation problem, etc.

    Plus its wierd that you dont see human speculation as the #1 cause of the housing bubble.
    We have 0% rates today. We have 3.75% 5/1 ARMs… but we dont have a bubble in housing. Why? Because the human element is missing. “Rates” dont really mean that much.


    BR: We don’t have inflation now, but we had HUGE inflation from 2001 to 2008, as food prices soared, house prices spiked, oil went up 6-fold and gold tripled . . .

  10. gbgasser says:

    I actually agree with Greenspan and I am maybe the most ardent liberal here.

    Much that I have read the last few months has convinced me that monetary policy is worthless in achieving the goals ot pretends to be trying to achieve (full employment and low inflation). So if its worthless it doesnt matter what the short term rates are set at. Many good arguments can be found for ALWAYS keeping the rates at 0%

    I’ve heard it explained by Mr Mitchell and Mr Mosler that our current policies are attempting to regulate banking (and hence the money supply and inflation rates) from the LIABILITY side of the ledger when in fact we should be regulating the ASSET side of the ledger. This, they say, is a hold over from gold standard days and in our non convertible floating exchange rate currency system we are functioning under we are going about it backwards.

    So Mr Greenspan may be right but he’s still expressing this point for the wrong reasons, trying to save HIS reputation and probably not because he sees the flaws of “monetarists” policy in the first place.

  11. dead hobo says:

    cognos Says:
    March 19th, 2010 at 10:01 am

    We didnt have 1 single bit of persistent inflation. In fact, we have net deflation. The crisis of 2008 was a DEFLATION crisis. What does that say about monetary policy?

    You sure don’t know much.

    World wide productive excess capacity kept CPI measured prices down.

    Asset inflation is inflation, even though the CPI doesn’t measure it and the Fed is blind to it by design and stated preference.

    Low rates and a criminally unregulated financial environment allowed asset inflation to grow into a world wide firestorm.

    We have asset inflation today, just less of it as compared to a couple of years ago. There is nothing to prevent asset inflation from growing into another firestorm if the economy improves. I strongly believe the Fed is using asset inflation as a monetary tool to ‘protect the financial markets’.

  12. Mannwich says:

    And this is the best (and most telling) part of your post…….

    “Hey, where were all those States right advocates back then? My Spidey-Sense is tingling! I suspect these new states rights people are not at all concerned with states rights at all, and are more likely little more than hypocritical partisans.”

    Hypocrites are everywhere in the name of fleecing someone to make a buck.

  13. Mannwich says:

    Wow cognos. “No inflation”? How about inflation in homes, stocks, commodities and other assets? Oh, that’s right. Those “don’t count” on Wall Street and in your world. Moron.

  14. Mannwich says:

    ………and let me add – inflation in health care, education, food. Anything else that we want to pretend doesn’t exist because we decide not to “measure it”?

  15. Mr.E. says:

    The role of the Fed is clearly spelled out in the Federal Reserve Act. At its very core the function of the Fed is credit – its creation, proper use and management for the betterment of the economy broadly.

    The Fed has three functions: conduct the nation’s monetary policy, provide and maintain an effective and efficient payments system, and supervise and regulate banking operations

    Mr. Greenspan has acknowledged that the Fed failed to properly discharge its responsibility of supervising and regulating banking operations. What I cannot swallow is his denial that the Fed’s decisions ad actions in the conduct of monetary policy were any less a failure.

    If the Fed “didn’t take seriously enough the risks building in the subprime mortgage market last decade” then they failed to properly manage the creation and proper use of credit by many homebuyers. If the Fed “didn’t demand that banks hold enough capital” the Fed failed again to properly manage the creation of credit. Even if the housing bubble was stimulated by “longer-term rates, which were driven lower by a flood of savings released by emerging markets into the global financial system”, the Fed failed again to respond by managing the creation of credit and its proper use.

    Mr. Greenspan has been trying to hide behind the guise of the Fed’s limited control of overnight lending to banks. It won’t wash. The Fed had the authority and the tools to effectively control and manage the creation and use of credit broadly. The decisions and actions by the Fed under Mr. Greenspan’s Chairmanship directly determined the credit policies and management that led to the housing bubble and its subsequent implosion. Quite simply, the Fed’s conduct of monetary policy under Mr. Greenspan’s leadership was a also a failure. At a minimum Mr. Greenspan was grossly negligent in his role as Chariman of the Federal Reserve.

  16. comet52 says:

    The best nuts and bolts explanation of the roots of the crisis I’ve read is here:

    However it is not about laying blame, it’s simply a very good explanation of a causal chain of events whose roots stretch back farther than most have assumed.


    BR: I was not particularly persuaded by Gary Gorton’s explanations . . .

  17. ReturnFreeRisk says:

    The low rates on Fed Funds drove down the long rates. Look at Japan, their low overnight rates have kept their bond ylds sub 2% (10 yr was .67% at one point) in the 90s. there was no world wide depression in bond yldss then. what is greenspan’s excuse for Japan. BOJ governors actually commented on the US situation back in 2006 saying – why is it a conundrum? you keep short rates low, say you are going to keep them low and raise only a little, float ideas that the “neutral” rate is 3% or thereabouts. And then sit back and wonder why 10 yr rates wont go above 5%? what was Greenspan expecting? 1% Fed Funds and 7% 10 yr? do you know what it takes to short the 10 yr bond at 5% when these jerks are not going to raise rates more than 25bps at a time for years? the negative carry on that trade is enormous. The bond vigilantes were neutered in the last cycle. And he has the gall to come up with these bs theories to explain long rates.

  18. rootless_cosmopolitan says:

    Barry’s explanation that low mortgage rates had been caused by low “interest rates” set by the Federal Reserve has one major flaw. The Fed Funds target rate isn’t “the interest rates” in the economy. The Fed Funds rate is merely the rate for which banks lend each other their excess reserves. These excess reserves amounted to only a few billion dollars back then. Many private funds have much larger pools of money at their disposal, with which they operate in the markets. In contrast, lending by banks amounts to many trillion of dollars in the markets. Barry asserts that the interest rate on this marginal money pool of excess reserves controls the market interest rates of loans, which have a summarized worth of many trillion dollars. The causal link how this is supposedly possible is absolutely missing. This is like the tail is wagging the dog. It’s just postulated by Barry that this was a fact.

    We also can look at the data. If Barry was right, the Fed Funds target rate would have to be lowered first, and then the mortgage rates would have to follow.

    Instead, the 30-year and 15-year fixed mortgage rates, and even the 1-year fully indexed ARM had already moved lower since summer 2000, while the Fed lowered its target rate about a half a year after the mortgage rates started to move lower. Besides that, there is barely a correlation between 30-year and 15-year mortgage rates and the Fed Fund target rate. The data contradict Barry’s assertion. However, the data support the notion that the Fed isn’t controlling the interest rates on the loan market, but the Fed is rather reacting to the changes in the market interest rates by adjusting the Fed Funds target rate.

    Well, I guess neither lack of plausibility that interests rates on a tiny money pool control the interest rates in a loan market, which is many times larger, nor contradicting data will shatter any preconceived views in the forum here. Cognitive dissonance rules.


  19. Hantra says:

    Where were the states rights advocates? Where was the MEDIA? No one told us about this Federal Pre-Emption thing when it was going on. If they had, I would hope that at least someone would have argued for states rights. I know I would have. But I’m an originalist. Not like these people who have hijacked the word “Conservative”.

  20. It was buried, and not well known at the time.

    I’ve discussed it, as have several other media outlets.

    STUDY: Federal Pre-emption of State Anti-Predatory Lending Laws Led to More Mortgage Defaults

  21. trandolph says:

    Greenspan should be Madoff’s cell mate.

  22. VennData says:

    I’m only glad that some many right-wing tax avoiding ideologues wasted their money on depreciating second homes, second cars, and second wives. How did those tax cuts, regulatory gutting and high leverage work for you in the naughts, Boys? Greenspan, another Reagan legacy.

  23. Mannwich says:

    @VennData: But somehow it’s all Obama’s fault. Sound “logic” at work.

  24. scharfy says:

    Not a Greenspan Fan…. But, but ,but….

    He does make some compelling points about the various funding mechanisms of the Asset bubble.

    Not all of the speculative money came from cheap money in the short end of the curve – (meaning his monetary decisions)

    Certainly much of it came from his “Global Savings Glut” – and sought the path of least resistance, which was the unregulated non-bank finance Arm (and banks as well) of the US – where it was sliced and diced and packaged and leveraged.

    But keeping the short end low – no doubt was fuel on the fire, or perhaps even the spark.

    At the end of the day, many people could have taken the keys from the drunk – (including homeBUYERS) but that’s not how it went down.

  25. scharfy

    Its important to understand how the ultra-low rates impacted

    1) Demand for higher yield
    2) Which led to the creation of AAA Junk paper
    3) Which created a huge demand for MORE subprime paper,
    4) Which led to the abdication of lending standards

    NONE of this would have happened if rates were at normalized levels

  26. The Curmudgeon says:

    Federal laws have, since at least the New Deal era, have always preempted state laws when the two are in conflict on the same point. In residential real estate mortgage lending, that works out to mean that states can have usury and pre-payment penalty laws that are different from federal laws, but that don’t apply, in the vernacular, to “HUD approved lenders”. In Alabama, which has a state prohibition against prepayment penalties, it means that HUD approved lenders could still charge them. And the only lenders that weren’t “HUD approved” were local outfits that didn’t operate across state lines. From Ameriquest to Countrywide, prepayment penalties can and were charged, and that’s how it was since long before the Bush Administration.

    Another factor that needs further exploration: The balance of payments issue with China, et al, but mostly China. By China trying to keep its currency fixed against the dollar, even in the face of massively selling more goods to us than it buyed, meant that the surfeit of dollars it held (from selling yuan to keep its value fixed) had to be invested somewhere. That’s where Fannie and Freddie come in. GSE bonds were, and are, a Chinese favorite for parking excess dollars, helping keep market rates in the US low. But the trail leads back to the Fed. If the Fed knows China is dedicated to keeping a fixed exchange rate for dollars to yuan, it knows, or should know, that ultra-low interest rates in US dollars will work through the process to produce massive inflation somewhere. It did–in assets and commodities–neither of which are much counted in the CPI, thus making it look as if its strategy was a paragon of prudence. It wasn’t.

  27. cognos says:

    Mannwich and Dead Hobo -

    So you guys say we have inflation in houses and commodities? (WTF!?!)

    IF there is no persistent rise in costs of living — rent (down), food (flat), clothing (down), services (down), entertainment (down) and healthcare (UP, but un-adjusted for quality) — there IS NO inflation.

    All “inflation” is, is the “cost of living”. If the “$ cost of living” a similar quality life is going down (which it is) then we are all wealthier. That is measured as “real” wealth.

    Its not about — “do the numbers go up”.

  28. dead hobo says:

    With respect to pensions and low rates:

    Yes, the Fed can accept responsibility for many pension fund failures due to historically low rates and the bad economy that resulted from their failed policies.

    From an accounting point of view, the pension expense for a defined benefit plan is partially driven by the expected interest rate the plan expects to get on invested assets. If the expected rate and actual rate match, then the world is fine. If the actual rate is lower than the expected rate, then the shortfall must be made up. If it isn’t made up, then the pension liability shortfall must either by made up from existing cash or put off and accumulated into a larger unfunded liability.

    Thus, pensions must accept additional risk and cross their fingers OR make larger cash contributions from current profits or tax levies. These payments are contractual obligations. The pension managers are between a rock and a hard place.

    Thus, the Fed and it’s ZIRP is causing pensions to fund current asset inflation in search for revenue to support pension expense. When the bubbles burst, so go the pension assets. It’s a nasty, vicious cycle.

  29. The Curmudgeon says:


    Inflation is everywhere and always a monetary phenomenon. If you couldn’t see inflation in everything from houses to barrels of oil from around 2002 until the crash, i.e., an increase in prices due mostly to monetary manipulations and not demand increases, well, you have some…

    cognos-itive dissonance.

  30. dead hobo says:

    cognos Says:
    March 19th, 2010 at 11:45 am

    Mannwich and Dead Hobo -

    So you guys say we have inflation in houses and commodities? (WTF!?!)

    We had massive inflation in home prices, you moron. Don’t you read the papers?

  31. theorajones says:

    I know that it’s very fashionable to pretend ACORN is the worst organization in the history of the world, because a bunch of political operatives showed if you never release original footage, you can edit video to make front-line workers earning minimum wage look like they’re going along with an entrapment plan.

    But they had a unique market perspective–they went door-to-door in poor neighborhoods, every day. They saw things happening that others did not see. And they were downright hysterical about predatory lending: April 22, 2004: “ACORN to Protest Predatory Lending at Wells Fargo Annual Meeting; ACORN Members Will Also Speak at Meeting in Support of Anti-Predatory Lending Resolution. ” Sure, they had a political agenda. But, uh, who doesn’t?

    This was an economic indicator that Greenspan totally ignored. He let his personal ideology and his preference for the views of fine, upstanding corporate citizens like Wells Fargo blind him to what groups like ACORN were pointing to. That there was a systemic rot in this system, and that lenders were behaving very poorly. (And, I’m sorry, but when you actually read their critique of mid Aughts lending practices, it’s not radical or even particularly populist. And it’s not like they were the only ones.

    The reality was that Greenspan was doing unprecedented things, experimenting with the markets, but he had no deep curiosity about the results. He had a theory that markets took care of themselves. He simply spoke with the people who believed what he believed, and looked at the data which supported his confirmation bias. Markets were up, homeownership was up, his friends in the financial industry hailed him as a genius, clearly he was right. He didn’t give a crap about data that didn’t fit into his story.

    Even now, he’s unable to admit he bears any meaningful responsibility. Because he still doesn’t believe he or his theories were really wrong. And he doesn’t believe his reckless experiments did any harm.

    Just like the rest of Wall Street.

  32. advocatusdiaboli says:

    Cnncise and accurate summary BR–congrats. Well done. Greenspan knows this all very well, he’s just trying to baffle the critics of his ruinous ideology with bullshit so he can sell more of his book. It always was, still is, and always will be about the Benjamins for just about everyone except those very few who just want to watch the world burn.

  33. rootless_cosmopolitan says:


    Although I don’t buy into Barry’s, and apparently the majority’s view here to attribute the housing bubble to the low Federal Funds target rate personified in Greenspan and I also wrote why I don’t do this, but your assertion that there wasn’t any inflation, but there rather was deflation during the housing bubble over the last decade is totally contradicted by the data. Go look at the data:

    CPI for all items: 2001-01-01 175.600; 2008-01-01: 212.225; rate of change over the period: 20.9%
    or food: 2001-01-01 170.300; 2008-01-01 208.075; rate of change: 22.2%
    or housing: 2001-01-01 174.500; 2008-01-01 212.863; rate of change: 22.0%
    energy hugely up: 2001-01-01 135.000; 2008-01-01 227.884; rate of change: 71.8%

    Only apparel has been down: 2001-01-01 129.400; 2008-01-01 119.743; rate of change: -7.5%

    Disinflation or deflation has been a phenomenon of the recession since 2008, as usual during recessions. In housing it’s still ongoing and I think it’s likely that there will be more deflation in coming years, if there is a depression Japanese style. Otherwise, back to inflation, and then higher than during the last decade, perhaps.


  34. dead hobo says:

    Re the Fed and pension fund destruction:

    I strongly suspect the FOMC’s eyes glaze over when pensions are discussed in much the same way as everyone’s eyes glaze over. Phrases like unfunded liability or service cost or expected return are guaranteed people repellent. Yet the Fed, combined with some poor foresight when it came to negotiating pensions, is responsible for massive economic dislocation when shortfalls are made up. What’s your pleasure … higher taxes at the state and local level? You got it! Or we can stick it to the Federal Govt with the pension benefit guaranty corp. They’ll just get Fed electro money or loans from China to cover their bills. The Fed is the gift that keeps on giving.

  35. rootless_cosmopolitan says:

    @The Curmudgeon:

    “Inflation is everywhere and always a monetary phenomenon.”

    What does this specifically mean? Does this refer to base money, or to credit money? Does this refer to the money supply by itself or to the product of money supply and circulation velocity of money?


  36. torrie-amos says:

    imho, there’s one missing piece, states and muni’s refied mid 90 paper for newer paper at lower rates and took on tons, just tons more debt, one of the problems being they really had never put the money to proper use the first time en whole, states and muni’s also rob peter to pay paul so what was left in bond money they used in 00-03 to help out, and then when economy picked up they levered up again, they are in dire straits

  37. [...] Greenspan was wrong on monetary policy AND bank regulation.  (Big Picture) [...]

  38. scharfy says:

    Sorry to clutter to the page… but heres the Fed fund rate from 1990-2008. (absent months mean no change)

    Obviously, the cheap money period 2002 – 2004 correlate with the blow off phase. However, cheap money doesn’t tell the whole story, in my view.

    Real Assets had been in a bull for quite some time, and you certainly can’t isolate low short term rates as the primary cause, can you?

    Thus, Greenspans’ point – that real external funding also fueled these speculative bubbles, as well as lax regulation, oversight etc. and sheer humanity, while an exculpatory plea to be sure, seems to have some degree of merit.

    I am not disputing Mr. Ritholtz that cheap money lubricated and fostered the securitization of junk, and was gasoline at the end – but Greenspan at least has me curious to look at other factors as well. We managed a stock market bubble with no debt, just equity. Good discussion and I’d welcome any rebuttals. Alans paper , though heavy – is worth a read. Just don’t get fooled fooled as easy as me by his red herrings.


    December 16 … 75 – 100 0 – 0.25
    October 29 … 50 1
    October 8 … 50 1.5
    April 30 … 25 2.00
    March 18 … 75 2.25
    January 30 … 50 3.00
    January 22 … 75 3.50


    December 11 … 25 4.25
    October 31 … 25 4.50
    September 18 … 50 4.75


    June 29 25 … 5.25
    May 10 25 … 5.00
    March 28 25 … 4.75
    January 31 25 … 4.50


    December 13 25 … 4.25
    November 1 25 … 4.00
    September 20 25 … 3.75
    August 9 25 … 3.50
    June 30 25 … 3.25
    May 3 25 … 3.00
    March 22 25 … 2.75
    February 2 25 … 2.50


    December 14 25 … 2.25
    November 10 25 … 2.00
    September 21 25 … 1.75
    August 10 25 … 1.50
    June 30 25 … 1.25


    June 25 … 25 1.00


    November 6 … 50 1.25


    December 11 … 25 1.75
    November 6 … 50 2.00
    October 2 … 50 2.50
    September 17 … 50 3.00
    August 21 … 25 3.50
    June 27 … 25 3.75
    May 15 … 50 4.00
    April 18 … 50 4.50
    March 20 … 50 5.00
    January 31 … 50 5.50
    January 3 … 50 6.00

    May 16 50 … 6.50
    March 21 25 … 6.00
    February 2 25 … 5.75

    November 16 25 … 5.50
    August 24 25 … 5.25
    June 30 25 … 5.00

    November 17 … 25 4.75
    October 15 … 25 5.00
    September 29 … 25 5.25

    March 25 25 … 5.50

    January 31 … 25 5.25

    December 19 … 25 5.50
    July 6 … 25 5.75
    February 1 50 … 6.00

    November 15 75 … 5.50
    August 16 50 … 4.75
    May 17 50 … 4.25
    April 18 25 … 3.75
    March 22 25 … 3.50
    February 4 25 … 3.25

    September 4 … 25 3.00
    July 2 … 50 3.25
    April 9 … 25 3.75

    December 20 … 50 4.00
    December 6 … 25 4.50
    November 6 … 25 4.75
    October 31 … 25 5.00
    September 13 … 25 5.25
    August 6 … 25 5.50
    April 30 … 25 5.75
    March 8 … 25 6.00
    February 1 … 50 6.25
    January 9 … 25 6.75

    December 18 … 25 7.00
    December 7 … 25 7.25
    November 13 … 25 7.50
    October 29 … 25 7.75
    July 13 … 25 8.00

  39. dead hobo says:

    scharfy Says:
    March 19th, 2010 at 12:56 pm

    However, cheap money doesn’t tell the whole story, in my view.

    You’re absolutely right. Low rates are a necessary condition but not a sufficient one. Demand for funds and the availability of funds at low rates are essential. The worst asset bubbles are the product of low rates and excessive credit available for junk purposes. The current low rate environment has created an asset bubble that is correlated with lots of basically free money concentrated in the hand of junk investors. The last much larger bubble concentrated cash in the hands of everyone and there was enough to spend it on anything that could be sold to a greater fool later. The current smaller equities bubble will unwind when excess funds go away, but how fast and how large is not predictable. The Fed will likely pump more cash into the hands of HFT users if it looks deflationary.

  40. rootless_cosmopolitan says:

    So, if the Fed Funds target rate isn’t the root cause for low market interest rate, what drove the market interest rates down? Attributing financial speculation and the credit bubble to low market interest rates actually means seeing things upside down. It’s the other way around. It’s an over-supply of capital in the markets that drives down interest rates. The over-supply of capital on the market is due to a relative over-accumulation of capital in the hands of the capital owners. The main purpose of economic activity in capitalism is accumulation of capital by investments that generate profit. To increase its wealth and to generate net profit that is accumulated in the hands of the capital owners, a society must produce things. However demand from the part of society that works for wages and salaries is limited, and demand for luxury goods is limited too. Also capitalists consume only as much and want to reinvest the largest part of their income for additional capital accumulation. There is always a conflict between limited demand and the need to expand markets to realize profits. Then there is also a secular trend of technological advances that eliminate workers from the process of production, and therefore consumers, and, in turn, limits demand even more.

    Capitalism regularly goes through cycles, in which phases alternate, a phase of market expansion and expanding profits and a phase during which the limits of demand become prevalent. In latter phase rates of profits on investments in production decline. With limited demand from income, demand from credit is substituting more and more the demand from income. There is an over-supply of capital, which is desperately looking for profitable investments. Financial speculation in the credit markets is a substitute for the lack of profitable investments in production. The over-supply of capital in the credit markets drives down interest rates. High leverage increases speculative profits. This works until it doesn’t, and the disproportions are violently resolved by an economic/financial crisis, during which capital that isn’t profitable is devalued. Then the whole cycle starts over, although on a higher technological level, with less people producing more goods than ever, enough to satisfy the needs of every human on Earth, if these needs wouldn’t have to be expressed as purchasing power.

    Nothing new has happened before and during the recent Great Recession. It has happened many times before all over the world, and it will continue to happen again. Greenspan was only a character mask to whom a certain function was assigned in this whole process in the social-economic system. If it hadn’t been Greenspan, it would have been someone else. Like there have been many Greenspans before and many more will follow.


  41. ywsimw says:

    Thanks for this excellent post. I fully agree with you !

    This is an “instant classic” as far as I am concerned.

  42. rootless_cosmopolitan says:

    Obviously, data don’t matter, when the mind is already set. If the data contradict any preconceived views the data are just being ignored. Cognitive dissonance rules.


  43. TripleSigma says:

    If everyone in the US just read this one post, I would die a happy man.

  44. cognos says:

    Hmm… Rootless… “big picture” please!

    Yes, I dont dispute the data.

    As you point out, there has been roughly 1.5% avg inflation over the last decade. The LOWEST in the modern history of the USD economy.

    The “GOAL” is not 0% inflation. The Fed sometimes talks about stating, “2%” as the inflation target. “2.5%” is probably a better target. Points is — relative to history and expectation it has been a deflationary period. ZERO inflation. Right?

    Remember when Barry R. was a “headline inflation” guy? Back in 06/07. Hows that headline number look?

  45. ToNYC says:

    Video killed the radio star in the early Eighties and Greenspan killed the US savers. Dead as a doornail with ZIRP c*ck-blocking our hard-earned savings being worth a rat’s zinger while he jumped to the head of the line and feeds the Banks with free money and denies the people interest on their money. What is there to like? What else is there to notice? Stop the misdirection and Greenblabber smoke and mirrors. This mirror is in-fogged.

  46. ZedLoch says:

    I’m no expert, but I disagree with the percentage of blame assigned to Greenspan. Enabler: yes. But did the Fed actually force anyone to do anything? I’m still on the fence to making it a “but for”…

    I’d much quicker point my finger to regulatory capture. What if the CFMA wasn’t passed? What if Lehman, Bear, Merrill were leveraging 12:1 instead of 40:1?

    The Fed lowered rates counter-cyclically because of (1) dot com bust, (2) 9/11, and (3) widepsread distrust in the markets after Worldcom, Enron, Adelphia, etc. Considering these things, if you were in Greenspan’s shoes then, would you have acted differently? (Knowing what we know now, yes, but assume you didn’t have a crystal ball…)

    Hijacking an old analogy of BR’s: The low rates were akin to everyone going 100 mph. The deregulation got rid of the lanes, roadsigns and seatbelts…

  47. rootless_cosmopolitan says:


    “As you point out, there has been roughly 1.5% avg inflation over the last decade.”

    Not true. I didn’t point this out. The time period of the numbers I quoted covers 7 years. Make it more near 2.7% inflation rate during this period.

    “The LOWEST in the modern history of the USD economy.”

    Not true. The period from the late 1950s to the 1960s had a lower average inflation rate,[1] which, BTW., was an excellent time to buy stocks. And, of course, the decade from 1925 to 1935, but maybe you don’t count this period to the modern history of US economy.


    “Points is — relative to history and expectation it has been a deflationary period. ZERO inflation. Right?”

    More than 20% inflation over 7 years is not Zero inflation. Certainly not deflation. It’s less inflation than during other time periods, but it’s still inflation.


  48. Mr.E. says:

    cognos said,

    “As you point out, there has been roughly 1.5% avg inflation over the last decade. The LOWEST in the modern history of the USD economy.

    The “GOAL” is not 0% inflation. The Fed sometimes talks about stating, “2%” as the inflation target. “2.5%” is probably a better target. Points is — relative to history and expectation it has been a deflationary period. ZERO inflation. Right?

    What is stated for current or past inflation is highly dependent upon the model used to determine inflation. The popular measures historically tracked by most US economists may have done a good job in the past of reflecting the impact of consumers or businesses spending and use of credit when the U.S. was a manufacturing-based economy. However, those same models that have been pointing to very low inflation did not show what was happening in real estate markets. Nor did they reflect the credit being consumed in purchasing foreign produced imports.

    Yes, over the past 10-20 years historic measures of inflation – take your pick – have been quite low. The problem is the models on which those measures are predicated. Those same models completely missed the credit bubble that was created and the resultant impact in real estate markets. Those models coupled with a steady 50-year downtrend in real GDP led the Fed, under Greenspan’s leadership, to embrace a very loose monetary and credit policies that, in the end, were extremely destructive to US consumers and business but sure helped many emerging economies that thrived off of credit-intoxicated U.S. consumers.

  49. super_trooper says:

    “In other words, his incompetence as a regulator made his incompetence as a central banker even worse.”
    @BR what universe are you from? Regulation did not exist in Greenspan’s vocabulary. He’s been an Ayn Rand since very young. Watch “The Warning” by Frontline, PBS.

  50. Simon says:

    Why is it that the Chinese pegging the Yuan to the dollar at a very low rate and as a consequence having to buy huge quantities of US treasuries never brought into this discussion on this site? Surely this was an enabling factor in keeping interest rates low.

    In addition the reason interest rates were kept low was to spur a recovery in employment. Why were people unemployed? Not just because of the crash it was also due to competition in manufacturing from China.

    Of course the broker dealers and prime brokers and what not loved the fees they got from handling all this money. Is it possible that there was lobbying to distract whoever is supposed to watch these things from noticing the effect of the Chinese yuan-dollar peg?

  51. Mr.E. says:

    Need to correct an error …

    in a post above I said “…coupled with a steady 50-year downtrend in real GDP… ”

    should have been
    “…coupled with a steady 50-year downtrend in real GDP growth …”

    Real GDP hasn’t been declining over that period, but the rate of growth overall has. Big difference!

  52. GB says:

    I think not only money managers were looking for better return but the average american was worried about inflation as well. Then come the wannabe flippers etc that took the cheapest mortgage product to maximize profits etc…

  53. bondjel says:

    Easy Al almost never takes responsibility for anything he has done. A read of Fleckenstein’s “Greenspan’s Bubbles” (and possibly of Barry’s “Bailout Nation”, I can’t recall) shows clearly that in 1996 during FOMC meetings G said he was sure raising margin rates would pop the “bubble” (which he later denied whether he could decide existed or not); then later in the early 2000s if memory serves me he denied there was any evidence that raising margin rates could pop bubbles. He just says whatever justifies his position at a particular time and very few people have gone back to see if has contradicted himself. He’s really gotten away with murder. I have read Sheehan’s “Panderer to Power” and was quite disappointed with it.

  54. Jim67545 says:

    Rates below norm also pull down the rates/payments on which CRE lending decisions are made, inflate DSCR ratios and pull down CAP rates which, in turn, inflates the appraised value of income property = Commercial Real Estate bubble.

  55. stevesliva says:

    As much as he was wrong then, Greenspan is doing Bernanke a favor by claiming there is justification for keeping rates low for an extended period. Saying anything else right now would abet the inflation hawks.

  56. jjay says:

    IMHO Greenspan, and for that matter all the criminals that promoted, ZIRP, NAFTA, CAFTA,GATT, Open Borders, H1B, etc. knew exactly the ruin their policies would bring on this country.
    They continue to laugh up their sleeves at the middle class they destroyed.
    If there wasn’t a conspiracy to bankrupt this country morally, financially, and culturally, there might just as well have been!

  57. stevenstevo says:

    Yeah, nice article–that sums it up about as good as I have ever seen. Reading it makes me realize how ridiculous it is for Greenspan to try to deny it. He’s either lying or he is an idiot.

    I just saw the other day how Greenspan is part of the whole Ayn Rand thing, a bunch of libertarian mumbo-jumbo, although it’s more cult-like, with a pinch of Scientology. Think they call it something else, reasonism or something stupid like that.

    I’m a free market kind of guy myself, but I think there needs to be a little regulation. Greenspan is on a whole different level though–he has said he doesn’t think fraud should be a criminal offense. Why not you might say? Let the markets sort it out Greeniepooh would say–his answer for everything. Unbelievable–the person in charge of regulating the financial industry did not believe in regulation.

    Problem is dude still hasn’t learned his lesson. Does he really think the housing market would have blown up so much if interest rates had been at 7%? I can see him getting older and all senile, walking around, yelling out at random, “Let the markets sort it out” every couple of minutes.

  58. V says:

    I don’t think it was the low rates in nominal terms that was the issue, but rather they were low in real terms, which calls into question the broader policy that has been in effect since the 1970′s of inflation.

    I don’t understand how even ‘modest’ inflation (say 2% is good for an economy), it’s still a halving of the purchasing power of money in approx. 35 years.
    In a world of wage arbitrage, how can this possibly end favourably for American workers?

  59. ToNYC says:

    Greenspan and Bernanke are late-stage Capitalism’s systemic cure pair. The system of Chinese-slave labor FED consumer Walfart garbage G’N’P can’t support 50% of the promises made in terms future purchasing power: pensions and health-care benefits for instance. The problem is surplus population hewing to the current paradigm of the consumer culture. The only solution to reverse future Chinese ownership rightfully theirs via their USTs is choosing re-use and re-purpose and naturally, by Mahatma Gandhi and not by trade laws, whack their supply of crack crap.
    Seen this one about “Stuff”? [The Story of Stuff]

    The FED has done its part by applying massive doses of high nitrogen fertilizer ZIRP to an annual rye grass consumer society. Looks great if you sell the property before two months. Audit them ’till they puke up their truth…Stephen Friedman tells all you EVER need to know about the FED

    hat tip to ZeroHedge

    specifically in comments at 37:25

    by monmick
    on Fri, 03/19/2010 – 12:17

    Check out Friedman starting at 37:25…

  60. Winston Munn says:


    While I don’t challenge the data, there is a challenge in your analysis and conclusion based on the data. You say: “With limited demand from income, demand from credit is substituting more and more the demand from income. There is an over-supply of capital, which is desperately looking for profitable investments.”

    I believe you miss the point in the first sentence: demand substitution was a result of policy changes. And the demand for goods never changed, as you suggest. The availability of money to the working class changed. While it is true that credit drove the bubble, it was demand for that credit (in the form of low interest rates) that initiated the drive.

    The over-supply you make out as the cause of increased credit is actually a result of two policy changes, both approved and encouraged by Greenspan: 1) globalization of the workforce, and 2) transfer of wealth to the most wealthy by tax cuts.

    The demand never changed – the only thing that changed was the willingness to share the profits of the increased productivity with the working class. (In fact, Greenspan has argued over and over to cut social security benefits even when that system was solvent as a disguised method to redirect money to general budget [where the tax breaks for the rich lurk] shortfalls.) As increased production profits were hoarded, the credit demand increased as a substitute for wages that were held in check by policies.

  61. [...] Barry Ritholtz has a good explanation of how low interest rates helped precipitate the housing bubble. [...]

  62. TK says:

    Barry, Thanks so much for mentioning the Bush administrations preemption of state predatory lending laws. The key decision of the Supreme Court, Watters, was an abomination. Interestingly it has since been reversed (sub rosa) in a decision written by Scalia, but it did a lot of harm at the crucial time.

  63. [...] the Impact of Ultra-Low Rates to Greenspan (The Big Picture) Barry Ritholtz argues that Greenspan’s exoneration of ultra low rates is belied by [...]