Rossputin.com: Rational Thinking About Our World

Here's a more-clear-than-usual article by former Fed Chairman Alan Greenspan in which he makes a few important arguments:

"...bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own."

"...the impact on demand for homes financed with ARMs was not major. Demand in those days was driven by the expectation of rising prices--the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted)."

"In mid-2004, as the economy firmed, the Federal Reserve started to reverse the easy monetary policy. I had expected, as a bonus, a consequent increase in long-term interest rates, which might have helped to dampen the then mounting U.S. housing price surge. It did not happen....

In retrospect, global economic forces, which have been building for decades, appear to have gained effective control of the pricing of longer debt maturities. Simple correlations between short- and long-term interest rates in the U.S. remain significant, but have been declining for over a half-century. Asset prices more generally are gradually being decoupled from short-term interest rates. "

For the full article, see:
"The Roots of the Mortgage Crisis", Alan Greenspan, WSJ, 12/12/07
http://www.opinionjournal.com/editorial/feature.html?id=110010981