Greenspan Reloaded

Heir Greenspan said today that the GSEs have gotten too big - that Fannie Mae's and Freddie Mac's portfolios should be limited in size because they pose a systemic risk to the U.S. financial system. They have been using their "implied government guarantee" as an advantage over their competitors, and this has allowed them to grow to a size that is now dangerous.

Well, what did he think was going to happen?

Excesses like this happen during bubbles - and mortgage lending is a bubble - made possible through Fed monetary policy. A completely different bubble than the last bubble, with a different set of participants - in fact, the real estate/mortgage lending bubble is for all the people that didn't get to participate in the last bubble!

Can you imagine Franklin Raines watching the Pets.com commercial during the 2000 Superbowl, monitoring the rise of WebVan, or trying to get in on the VA Linux IPO, and somehow feeling left out? He was stuck in boring real estate, and real estate wasn't going anywhere.

Or, how about your typical 401k investor? Many of these people didn't fully commit to their plan's Aggressive Growth fund until after full year 1999 results were in and the dangers of Y2K had passed - they were assured that this "new economy" thing was for real ... I guess you could say they participated in the last bubble, but, not in a good way.

Or, how about real estate professionals, builders, and construction workers? Many of them didn't own any stocks during the last bubble because of an innate distrust for "paper" things - they preferred tangible assets like real estate, even if real estate was boring

For years, millions of people were reluctantly getting accustomed to jargon like IPOs and burn rates, while at the same time observing absurdities like the AOL purchase of Time-Warner - they didn't understand it ... they felt left out. During this time, instead of buying tech stocks these people were waiting, building demand - longing for a bubble that they could participate in. And, this pent-up demand was unleashed when the Federal Reserve lowered interest rates to levels not seen in 40 years, and then held them there for a "considerable period of time".

Somehow, the problems at the GSEs seem almost normal ... in a dangerous sort of way.