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Wednesday, December 12, 2007

Alan Greenspan: The Roots of the Mortgage Crisis (or, It Wasn't My Fault)

Alan Greenspan the patron saint of easy moneyAlan Greenspan the patron saint of easy money

Alan Greenspan, Commentary / Wall Street Journal:
The Roots of the Mortgage Crisis --
Bubbles cannot be safely defused by monetary policy before the speculative fever breaks on its own.
On Aug. 9, 2007, and the days immediately following, financial markets in much of the world seized up. ... Over the past five years, risk had become increasingly underpriced as market euphoria, fostered by an unprecedented global growth rate, gained cumulative traction.

The crisis was thus an accident waiting to happen. If it had not been triggered by the mispricing of securitized subprime mortgages, it would have been produced by eruptions in some other market. As I have noted elsewhere, history has not dealt kindly with protracted periods of low risk premiums.

The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall. Following these world-shaking events, market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World.

A large segment of the erstwhile Third World, especially China, replicated the successful economic export-oriented model of the so-called Asian Tigers ... to unleash explosive economic growth. ...

The surge in competitive, low-priced exports from developing countries ... flattened labor compensation in developed countries, and reduced the rate of inflation expectations..., including those inflation expectations embedded in global long-term interest rates.

In addition, there has been a pronounced fall in global real interest rates since the early 1990s, which, of necessity, indicated that global saving intentions chronically had exceeded intentions to invest. ... Asset prices accordingly moved dramatically higher. Not only did global share prices recover from the dot-com crash, they moved ever upward. ...

After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own. There was clearly little the world's central banks could do to temper this most recent surge in human euphoria...
discussion:
Herb Greenberg / MarketWatch:
Alfred E. Greenspan: “What, Blame Me?” -- Alan Greenspan’s “don’t blame me” ope-ed piece in the Wall Street Journal today was greeted with more than a dose of cynicism by hedge fund manager Bill Fleckenstein, whose book, Greenspan’s Bubbles: The Age of Recklessness at the Federal Reserve,” is scheduled to come out next month. According to Bill ....

He would have you believe that it was the collapse of communism that created the mortgage crisis. However, he does get a couple of points correct: “The root of the crisis, as I see it, lies back in the aftermath of the Cold War, when the economic rule of the Soviet block was exposed with the fall of the Berlin wall.”

He is right. That is approximately when the crisis began, but that’s because it was close to the beginning of his term at the Fed, which started in mid-1987. It’s the mistakes made during his tenure that created these problems. [...]

Economist View blog:
Alan Greenspan: The Roots of the Mortgage Crisis (or, It Wasn't My Fault) -- Alan Greenspan defends monetary policy during his reign as Chair of the Fed. He says the Fed's low interest rates did not play a major role in creating the subprime crisis, instead, factors such as the fall of the Berlin Wall were much more important [...]

Steve Matthews and Tom Keene / Bloomberg
Fed Historian Meltzer Says Greenspan Is `Too Easy on Himself' -- Former Federal Reserve Chairman Alan Greenspan ignored warnings about the Fed's low interest rates that fueled real estate speculation and the current housing recession, said Allan Meltzer, professor of political economy at Carnegie Mellon University in Pittsburgh [...]

Felix Salmon / Finance blog / portfolio.com:
Greenspan's Legacy: The Housing Bust -- Alan Greenspan accepts little if any responsibility for fueling the housing boom [...]

the main reason why the housing bust seems to be much worse in the US than elsewhere is surely those ARMs – which, as Greenspan concedes, were a function of low short-term interest rates. [due to Greenspan] ...

The problem in the US is those ARMs, which are resetting to levels which people can't afford. The housing bust (if not the housing boom) is Greenspan's legacy, and it would be nice if he were a little more honest about it.

Paul Kedrosky / Infectious Greed:
Greenspan: Not Me! Gorbachev! Brazil! Investors! -- When I was growing up my mother used to say the same person caused every mishap around our house. That person stuck a screwdriver in the TV, broke the talking robot, hid the dirty dishes under the fridge, poured lemonade on the Roger Whittaker album, etc. Who was it? NotMe -- or Not Me, to be linguistically precise, because that it was what my brothers and I used to always say when accused: "Not me! Not me!"

I had a similar feeling today in reading Alan Greenspan's WSJ column about subprime. He found fault pretty much everywhere but in his own actions in explaining the current subprime-related credit problems in the U.S. It was glasnost and the end of the Cold War; it was emerging economies; it was low-priced exports; it was market euphoria, etc. It just wasn't, you know, him. [...]

patrick.net:
Greenspan Smoking Crack Again

FreeRepublic:
The Roots of the Mortgage Crisis (Op-Ed by Alan Greenspan)

discussion:

Matthew Yglesias, European Tribune, The Carpetbagger Report, Calculated Risk and EconLog

related:
Some of us saw this crisis coming two years ago because of the "Greenspan Effect" - the global warming of the financial markets.

The Mess That Greenspan Made blog - How 18 years of easy money have changed the world
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Jeff Davis on printing moneyDaily Speculations:
From "The Rise and Fall of the Confederate Government" by Jefferson Davis:

The issues of Treasury notes were increased until, in December, 1863, the currency in circulation amounted to more than six hundred million dollars, or more than threefold the amount required by the business of the country. The evil effects of this financial condition were but too apparent. In addition to the difficulty presented to the necessary operations of the government, and the efficient conduct of the war, the most deplorable of all its results was, undoubtedly, its corrupting influence on the morals of the people. The possession of large amounts of treasury notes led to a desire for investment; with a constantly increasing volume of currency, there was an equally constant increase of price in all objects of investment. This effect stimulated purchase by the apparent certainty of profit, and a spirit of speculation was thus fostered, which had so debasing an influence and such ruinous consequences that it became our highest duty to remove the cause by prompt and stringent measures.
------

Calculated Risk

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