Wikinvest Wire

Greenspan overfloweth

Tuesday, April 08, 2008

Sometimes the best defense is a good offense and that clearly seems to be the tack that former Fed chairman Alan Greenspan has been taking as an increasing number of individuals lay the blame for the current economic and financial mess at his feet.
Given the circumstances, that seems a reasonable response, but a much better solution to his current "blame problem" would have been a more proactive approach years ago.

If money had not been so easy for so long and had there been more than lip service to regulatory measures during "The Age of Bubbles", maybe there would be much less blame to go around two years into his retirement.

On the front page of today's Wall Street Journal can be found a story by Greg Ip on this subject "His Legacy Tarnished, Greenspan Goes on Defensive", where a mention of this humble little blog appears about halfway through.

Anti-Greenspan sentiment has cropped up on blogs such as The Mess That Greenspan Made and Greenspan's Body Count, the latter a tally of deaths purportedly linked to the real-estate bust. Hedge-fund manager William Fleckenstein's book "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve," released in January, is now in its fourth printing.

Mr. Greenspan says many of the criticisms against him are unjust. He is particularly perturbed by attacks over a 2004 speech in which he suggested that more borrowers would benefit from adjustable-rate mortgages. Interest rates were at a historical low at the time, which means that those who held on to the mortgages would have seen rates adjusted upward.

Mr. Greenspan says the speech merely pointed out that many people who get a 30-year mortgage move or refinance long before it matures. Eight days after giving the speech, he says, he clarified his comments to say he didn't mean to disparage 30-year fixed-rate mortgages. "I find it profoundly disturbing" that critics cite the recommendation and not the retraction, he says, tapping his fingers on the table in front of him. "In all seriousness, this is really quite unfair."
Greg really does nice work - very few get that middle capital "T" right.

Interestingly, in Bill Fleckenstein's interview at Financial Sense Online last weekend, he commented on the 2004 ARM speech noting that (if memory serves) there is no written record of the retraction one week later (if anyone wants to have a listen and leave a comment on this, please feel free to do so).

I'd like to think that I had something to do with the second of two counts leveled at the former central banker:
The prevailing view among critics faults Mr. Greenspan on two main counts.

First, they say, his Fed lowered rates too much from 2001 to 2003 to cushion the economy from the bursting dotcom bubble. Then it took too long to raise them again. Low rates fueled mortgage borrowing, driving home prices to unsustainable heights.

Second, they say, the Fed was lax in its regulatory role. The central bank failed to press for stiffer rules for underwriting mortgages to people who ultimately couldn't afford them, they say. Also, they say, the Fed failed to anticipate banks' exposure to risky home buyers, leaving them with too little capital to absorb the eventual losses on those mortgages.
I had the flu at the time, but I remember telling Greg that alarm bells should have been going off all around the Federal Reserve building a few years ago when home loans worth billions of dollars were being made to individuals who had no reasonable expectation of paying the money back.

Either the alarm bells didn't go off or no one was listening.

Overall, this is an even-handed account of the recent backlash and it's in the free area of the Journal - well worth reading in its entirety, particularly the last part about the late Ed Gramlich.

Also appearing today (and the source for the photo above) was a Bloomberg report with another grim assessment - Greenspan Says Credit Crisis Is Worst in 50 Years.

Reuters accounts of the WSJ interview appear in the New York Post where the headline shouts GREENSPAN BLAMES INVESTORS FOR CRISIS and another Reuters account appears at Yahoo! Finance - Greenspan says unfairly blamed, has no regrets: report.

For those of you who missed it I did an interview with The Maestro some time ago - it's well worth another read for those of you who may have missed it:

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David said...

Congrats on the mention. You are a true champion for reality.

Anonymous said...

the real problem is isolation:
between every stage of loan process;
wholesale loans with little introspection or assurance;
allowing 100% + loans
out the door to noncapable folks;
and finally allowing loc atm to max.

dearieme said...

Buiter is giving him a booting at the FT:-

njdoc said...

"Greenspan blames investors for crisis".

He is correct. Low interest rates were only one piece of the puzzle. However the investors he is referring to are the derivative securitizers that he helped to promote. So he is in fact, understating his role in the explosive growth of derivatives by his Fed's lack of regulation, and his seeming fondness for this investment product. Now he points the finger of blame at them. The media should continue to point all the positive statements he made in his promotion of derivatives.

Zeke said...

What about the third great Greenspan failure: failure to regulate derivatives in any meaningful way. He could sort of try to dodge this saying "not my job" except for he managed the bail out of LTCM in 1998. That showed that the derivatives were capable of toppling the banking system that he was the head of. He certainly could have gone to Congress and pointed out the problems with it all, but did not.

I believe it is TPM that calls the current system the "shadow banking" world. If the primary role of the Fed is creating and controlling money supply should he not have been a little alarmed that entities outside his control were effectivley doing the same thing via 32:1 leverage and profilgate issuance of all these weird instruments.

Other people were making a lot of noise about this a long time ago, like Warren Buffett.

Greenspan sat on his hands and let the investment banks go crazy, let the hedge funds go crazy, and even after he had to bail out LTCM he didn't do ANYTHING to prevent a repeat.

Thus Bear Stearns.

I think #3 is at least as damning as #1 and #2 on your list.

Greenspan Group said...

I find it interesting the argument primarily advanced to place blame on the Fed for the current crises (i.e., interest rates were set and remained too low) wholly ignores any culpability on the part of the mortgagors and mortgagees.
By that logic, an extremely obese person should blame the bakery for failing to set prices high enough to dissuade his own foolish consumption.

My questions to you: Isn't the blame more fairly shouldered by the borrowers and lenders?


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