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.Greg really does nice work - very few get that middle capital "T" right.
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."
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.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.
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.
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: