Thursday, March 12, 2009
Yesterday's lonely defense of Federal Reserve actions during the gestation period of the largest asset and credit bubble in the planet's history by the man once called "The Maestro" seems to have gone over like a lead balloon if today's reactions are any indication.
Following the op-ed piece adamantly titled The Fed Didn't Cause the Housing Bubble, long-time critics again sharpened their pencils and did their best to encourage the former Fed chief to just fade away from the spotlight, a graceful exit now clearly out of the question.
Caroline Baum at Bloomberg offered up this commentary earlier today:
Even if one missed the headline (“The Fed Didn’t Cause the Housing Bubble”) and the byline (Alan Greenspan) on the op-ed in yesterday’s Wall Street Journal, there could be no confusion over authorship: That “Master of Garblements” and former Federal Reserve chairman was back to defend his legacy.Yes, the well documented "conundrum" caused by millions of laborers coming down from the mountains in rural China that left the second most powerful man in the world powerless to prevent a housing boom from turning into what increasingly looks like another depression.
Greenspan lays out his case that the Fed’s easy money policies can’t possibly be to blame for “the U.S. housing bubble that is at the core of today’s financial mess.” It is long-term interest rates that determine “the prices of long-lived assets,” such as housing, he writes. And those rates, which stayed low as a result of a “global savings glut,” are out of the Fed’s control.
Putting a little meat onto the bones of yesterday's Alan Greenspan still hasn't got a clue when it comes to the argument of just how much long-term rates factored into the mid-decade housing mania, Caroline notes the following:
Banks and other mortgage lenders were happy to arbitrage the spread between the free money provided by the Fed and the rate they charged for an adjustable-rate mortgage. The share of ARMs as a percentage of total mortgage loans averaged 10 percent in 2001; by 2004, it was 32 percent, according to the Mortgage Bankers Association. The dollar volume swelled to more than 50 percent that year.There's much more over at Bloomberg, though the image conjured up by Northern Trust's Paul Kasriel of 'ol Greenie sitting down to read Charles Kindleberger’s classic "Manias, Panics and Crashes" is beyond my ability to comprehend.
It was Greenspan who sang the praises of ARMs from his Fed pulpit in a Feb. 23, 2004, speech. American consumers “might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage,” which may be “an expensive method of financing a home,” he said.
Tom Petruno consulted Ian Shephardson of High Frequency Economics in debunking the saving's glut/conundrum defense in an article at the LA Times today.
Shepherdson wrote:Don't look for an apology anytime soon - the guy will probably go to his grave believing that he did nothing wrong."The single biggest driver of the recession today is the meltdown in the adjustable-rate mortgage market, and in particular the subprime adjustable-rate mortgage market. The explosive growth in that market is directly attributable to Fed policy.Adjustable-rate loans typically were priced off short-term interest rates, including the one-year Treasury bill yield and the London Interbank Offered Rate, or LIBOR.
"When the Fed cut to 1% in mid-2003 -- we said at the time it was an enormous mistake -- it pulled into the adjustable-rate mortgage market millions of people who liked the rates but did not understand the adjustable part of the deal."
As housing bubble inflated, Shepherdson notes:"Mr. Greenspan lauded lenders’ ‘innovations.’ The number of subprime ARMs rose more than ninefold from late 2000 until the peak in mid-2007, with three-quarters of the increase coming between mid-2003 and mid-2005.
"The delinquency rate on these loans, by the way, now stands at 24.2% and it is still rising rapidly. Prime fixed-rate deliquencies are at 3.92%.
"Mr. Greenspan ought to have used the pages of the Journal to apologize to the nation. Instead, his piece will stand as a testament to his hubris, or perhaps his delusions."
History will not be kind.
Links to more reactions are provided below and, for those of you who might be interested, more are likely to appear at this Alan Greenspan News website.
• Greenspan: Fed could not have stopped US housing bubble - Telegraph
• Who's to Blame for the Economy? The Fed TheStreet.com
• Greenspan: Fed Not to Blame for Recession - Fox News
• Greenspan’s Denial - The Big Picture
• Alan Greenspan: "Don't Blame Me" - Baltimore City Paper
• Greenspan Yet Again Blames Others for Housing Bubble - Seeking Alpha
• Greenspan Responds to My Blog Post on the Financial Crisis - US News
If anyone comes across any positive reactions, please leave a note in the comments section.