Thursday, Mar 12, 2009
Alan Greenspan: We didn't start the fire
Wall Street Journal: The Fed Didn't Cause the Housing Bubble
By ALAN GREENSPAN. Some claim the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess. However it was not the overnight fed funds rate that was too low. Rather, it was the low rates on long term fixed rate mortgages, which became disconnected from the Fed's monetary policy in the early 2000s, as a result of a glut of savings from China and other emerging markets.
Tightening monetary policy by the Fed could not have "prevented" the housing bubble. I prefer Milton Friedman's assessment of our performance, in 2006: "There is no other period of comparable length in which the Federal Reserve System has performed so well."
Posted by little professor @ 12:46 PM (897 views) Add Comment
14 Comments
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1. paul said...
This is rubbish though.
The mortgage lenders had no choice but to chase lending rates to the bottom (following the Fed's rates) due to competetive pressures. "Rather, it was the low rates on long term fixed rate mortgages, which became disconnected from the Fed's monetary policy in the early 2000s, as a result of a glut of savings from China and other emerging markets." is diversionary.
As in the UK, central bankers were the only policymakers in any position to curb speculation based on underpriced risk from cheap credit. And they didn't.
At times, the world's central bankers are like the pilots walking away from the crash scene.
2. mountain goat said...
Greenspan has a point though. People complain that the Fed has too much power, is a private bank intent on total control etc. Greenspan resisted giving the Fed more power still by increasing banking regulation and over-sight. So the Fed did not have the power or mandate to investigate what the banking industry were up to. What the banks were up to was packaging toxic loans and calling them safe loans. So you could have given the Fed even more power, but really the main point of failure was the ratings agencies who let toxic loans be passed off as safe loans. What we need is more bankers and ratings agency bosses in prison for this fraud, not more power to government agencies to run the economy.
3. paul said...
Well maybe, however the bankers know though that by and large they were just doing their job - making money in whatever regulatory and risk environment presented itself. There won't be many facing jailtime for that reason. As Chuck Prince said in Feb 2007, "As long as the music keeps playing, we have to keep dancing".
Central banks are the backstop in so many ways than simply lenders of last resort - they also create and to a greater extent control the risk environment and as such they are in a unique position to influence the risk posture of a country's banking infrastructure. They can choose to use that power wisely or they can simply sit back, do nothing and wait for the lucrative advisory position after retiring on a fat comfy pension (all the time overlooking the inconvenient data coming through). Too many central banks have done just that.
Greenspan is justifying his after-career fee on so many levels in this article but quite frankly it doesn't wash with me. History will label our current central bankers as woefully misguided in their attitudes towards risk, and structural problems that have been building ever since the 1990s and possibly much earlier.
4. little professor said...
paul - to be fair the quote in your first post is my summary of what he was saying in the article, not a direct quote
5. paul said...
I understand that lp. Your summary is pretty accurate.
I should be clear, I haven't read the article because I refuse to even entertain the idea that central banks weren't responsible, especially when the argument is given by an ex-central banker.
In a number of candid admissions we now know that central bankers didn't really understand finance mechanisms of cheap credit at the time, and they didn't really understand the effect their interest rates would have on house prices, and they didn't really understand etc. etc.
Which all sound to me like they were way out of their depth and underqualified for their jobs, or they were just plain lazy, far more content to take the easy ride and fat salary.
6. crunchy said...
http://www.youtube.com/watch?v=YwpnH_OTZio
It's almost like watching Gordon Brown. He did not see it coming.
The frenzy in fraud was left unchecked on there so called watch. Blame the world, blame crunchy, but don't blame me!
7. crunchy said...
To be fair on Greenspan, at least he has admitted to some mistakes which is a whole lot more than lilly white Brown.
8. paul said...
By apologising, Greenspan has done more than Mervyn King ever will in admitting his own culpability.
9. crunchy said...
paul- Well, King did not take that huge pay off, I mean pay rise, so there is perhaps a tiny bit of guilt in left in him.
10. little professor said...
Interestingly in the article he uses the term "housing bubble" several times, yet while the bubble was inflating in 2000-2006, he consistently denied that there was any such bubble in existence.
International Herald Tribune, 2004
"Greenspan said fears of a speculative bubble in housing prices are exaggerated.
While home mortgages have soared, the value of property has climbed as well, he said. "Taking into account this higher level of assets," Greenspan said, "all in all the household sector seems to be in reasonably good financial shape with only modest evidence of an increased level of household financial strain."
New York Times, 2005:
Mr. Greenspan dismissed talk of a housing bubble: ''While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely.''
Wait, it gets worse. Last year he encouraged families to take on risky loans, touting the advantages of adjustable-rate mortgages and declaring that ''American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.''
New York Times, 2005:
Mr. Greenspan answered such criticism this week. ''Relying on policy makers to perceive when speculative asset bubbles have developed and then to implement timely policies to successfully address these misalignments in asset prices is simply not realistic,'' he said.
11. crunchy said...
10. little professor said...Interestingly in the article he uses the term "housing bubble" several times, yet while the bubble was inflating in 2000-2006, he consistently denied that there was any such bubble in existence.
He has said before that they tried to raise interest rates in 2004 to combat the bubble but it did not work. Go figure!
He has also stated that when a GLOBAL bubble is underway it is almost impossible to stop untill it finally runs out of steam. Words to the effect.
12. alan said...
The Swiss cut rates again, today.
The race has now ended with lots of players at the bottom.
Now currencies start to devalue, Rouble first?
13. mountain goat said...
Alan - The race has now ended with lots of players at the bottom. Now currencies start to devalue, Rouble first?
You may be onto something important there mate, this may be a turning point.
14. Johnny5thumbs said...
A man falling out from a 20th floor window might well congratulate himself on succesfully acheiving the first 19 floors without mishap as he plunges downward. But it doesn't mean that he can fly, or that his skills have contributed towards his success so far..