The "retraction" of the 2004 ARM comment

In the rush to get out of the house yesterday morning after the WSJ article by Greg Ip came out (see Greenspan Overfloweth), I didn't have time to look at the accompanying online report($) where the graphic below appeared - thanks for the mention Greg.

Here are a couple of choice excerpts from the Alan Greenspan interview and a bit more detail about the 2004 ARM comment and subsequent retraction eight days later:

WSJ: Do you worry that, as time goes by, the critical interpretations of your record -- that monetary policy was too easy, and regulatory policy too hands-off -- will become the conventional wisdom?

Mr. Greenspan: Yes. That's the reason why I have been pressing this issue. If that's the conclusion people are going to come to, then the evaluation of this period will produce the wrong answers and the wrong policies. If there are mistakes that are made or things are going wrong, we've got to find out why. It's important that mistakes of policy and policymakers be critically examined. But it's equally important that the diagnoses be accurate. If not, the new policies that derive from the diagnoses could be [wrong.]

I do take it seriously if my peers think I have misstated the facts. I try to be as objective as I can. I am reasonably certain that I am right here. If, however, I am proved wrong, I will change. I do not have a vested interest in holding wrong ideas. But where's the evidence? I am troubled that too many people make accusations by assertion. That I object to. I think it's improper.
...
WSJ: Critics often point to a 2004 speech where you argued that many borrowers would have benefited from taking out adjustable rather than fixed-rate mortgages. But you note that you clarified those comments saying you weren't trying to disparage fixed-rate mortgages in a speech to the Economic Club of New York eight days later. Why do you think this retraction is omitted?

Mr. Greenspan: [It must be that] it's not a good story that I retracted everything that I said days after. I find it profoundly disturbing, frankly, that the press did not say, "He did give that advice and that's not what he meant. He did it for eight days." Now, if those eight days created the housing boom, I've got more power than anybody has ever had in the financial system. In all seriousness, the failure to report my clarification eight days later has been quite unfair. If I was guilty of fostering ARMs, it was an eight-day guilt.

There was some question about this retraction yesterday. Here are both the original comments and the retraction as published by the Wall Street Journal online yesterday:

From the 2004 speech before the Credit Union group in Washington D.C.:

Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.

The retraction as published in yesterday's WSJ online (unedited, in its entirety):

Read Alan Greenspan's remarks following a speech to the Economic Club of New York, Mar. 2, 2004, where he said he clarified his comments about how many borrowers would have benefited from taking out adjustable rather than fixed-rate mortgages.

Henry Kaufman: Mr. Chairman. I want to get back to a view you expressed a week or so ago concerning adjustable rate mortgage financing. Assume for a moment at the extreme that most of us would move to adjustable rate mortgage financing. Wouldn't that really increase the volatility of mortgage financing, and the volatility of housing prices? And wouldn't that complicate the task of monetary policy?

Mr. Greenspan: Indeed it would, Henry, and I probably spoke imprecisely at a speech that I gave before the credit unions. I did not mean to disparage the 30-year self-amortizing mortgage. I thought I was focusing on a narrow segment of prospective households who didn't like either adjustable rate mortgages currently in place or the 30-year fixed and that they might like something slightly different which would be a variable maturity mortgage. I thought I was talking about a very small segment of households. The 30-year mortgage is one of the great inventions we've got in this market, including the secondary mortgage market and mortgage-backed securities that has occurred as a consequence of that. And indeed, I think you're fully aware that there are a lot of countries abroad that would be delighted if they thought they could get some of their variable rate mortgages shifted to fixed-rate mortgages. So all I can say to you is that that's not what I meant.

It is the case that if you look at the actual costs of taking long-term fixed-rate mortgages against adjustable rate mortgages, it is a significant cost and it does imply because of the huge desire to hold 30-year mortgages fairly significant risk aversion on the part of individual mortgagers. All I can tell you is that over the years, when confronted with an issue of borrowing on real estate, I always took a long-term mortgage. I thought that the price that you had to pay, which is significant, because remember we are dealing with an upward sloping yield curve, I thought granted the built-in option, I know a number of lenders which preferred it didn't exist, it was sort of a gimme putt for golfers.

If there was something to highlight in the retraction that would have made anyone think differently about the Fed study that talked about tens of thousands of dollars going back into people's pockets if they took out an ARM instead of a fixed-rate loan, I couldn't find it.

Anyone?