"Greenspan mess" sightings accelerate sharply

This editorial by Barrie McKenna in today's Globe & Mail contains one more in a growing list of recent "Greenspan mess" sightings. It's a good summary of the many sins of the former Fed chairman, so it is reproduced in its entirety (the picture comes from my personal collection, just to liven things up a bit - it's one of my favorites, but the one where he is proudly receiving a medal from "W" probably tops the list).

Did Greenspan sell out investors?
As global markets melt like a slab of butter on a hot frying pan, it's about time to figure out who cranked up the stove.

Where's Alan Greenspan, anyway?

Apparently, he anticipated our unwanted scrutiny.

The former U.S. Federal Reserve Board chief has taken great pains to shift blame for the mortgage crisis away from himself and the Fed's low-interest jet fuel of the 2001-04 period.

The maestro's take: A post-Cold War economic boom in the developing world produced a dangerous underpricing of risk on a global scale that no one - not even the Fed - could control.

Don't look at me, Mr. Greenspan argues. Blame China or India.
"The crisis was ... an accident waiting to happen," Mr. Greenspan wrote in a lengthy op-ed piece in the Wall Street Journal in mid-December. "If it had not been triggered by the mispricing of securitized subprime mortgages, it would have been produced by eruptions in some other market."

In other words, the Fed didn't push interest rates lower, the global economy did. China and other countries flooded the West with cheap products, kept wages low in developed countries and pushed down inflation expectations everywhere. Central banks lost control of long-term rates.

And lower interest rates sent asset prices - for stocks and real estate - sharply higher.

"There was clearly little the world's central banks could do to temper this most recent surge in human euphoria," Mr. Greenspan rationalized.

The explanation - like most of what Mr. Greenspan has to say - is thought-provoking. But perhaps just a tad too convenient.

Even if you accept Mr. Greenspan's argument that the Fed wasn't the source of all the easy money, it's tough for him to hide from the reality that he was a cheerleader for a mortgage industry gone wild.

He, along with George W. Bush, was an outspoken advocate for dramatically increased home ownership. And millions of Americans bought homes for the first time during the Greenspan years, fuelling a massive building boom. Many of those homes are now in foreclosure, housing starts have collapsed and prices are falling in most markets.

In a remarkable February, 2004, speech to a gathering of credit union executives, Mr. Greenspan lavished praise on now toxic adjustable-rate mortgage products. The apparent message to home buyers: They'd be crazy not to take the easy money.

Many of those 2004 mortgages, which started with low teaser rates, are now swamping naive homeowners as they reset to unaffordable higher levels.

So who was responsible for the low rates that made these mortgages possible? Even Mr. Greenspan acknowledges that the Fed's record 1-per-cent benchmark interest rate in mid-2003 boosted these exotic mortgages and raised home prices.

Mr. Greenspan conveniently ignores the Fed's other role - as a banking regulator. When the economic history is written, the conclusion may be that the Fed's biggest failing in the Greenspan era is what it didn't do, not what it did.

The Fed, which doesn't directly regulate the mortgage industry, nonetheless turned a blind eye to a host of obvious lending excesses, which caused systemic risk to the banking industry. Fed officials also watched as Wall Street financial alchemists ran amok, inexplicably turning junk mortgages into credit-worthy bonds.

And the Fed stood by as the major banks, brokers and hedge funds embraced this hazardous mortgage market. Indeed, Mr. Greenspan, a libertarian, argued against stricter hedge fund regulation, even after the 1998 collapse of Long Term Capital Management.

There may well have been "mispricing of risk" around the world, as Mr. Greenspan argued. But there was also plenty of evidence of recklessness closer to home, and scant effort to rein it in.

Ben Bernanke, an academic who succeeded Mr. Greenspan in early 2006, is now left to mop up the economic mess. Unlike Mr. Greenspan, the new Fed chief has been reluctant to reward the risk takers with knee-jerk interest rate cuts. He has also urged much stricter lending standards for the mortgage industry.

Mr. Greenspan, meanwhile, earns a tidy living selling his advice to the industry he failed to keep in check while he was a central banker. He makes speeches to financial groups for six-figure fees and sells his consulting services to the likes of bond giant Pimco and Paulson & Co., a New York hedge fund.

The current crisis isn't the making of one man.

But it's fair to say that Mr. Greenspan was a participant in the age of easy money, not just an accidental witness.

The Maestro was left off way too easy there at the end.

A conclusion starting with, "In the fullness of time, history may judge the early 21st century as the seminal failure in central banking that led to ..."

Or something like that.