Alan Greenspan on the "mortgage crisis"

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
  • Mike Volpe
    Comment from: Mike Volpe
    12/13/07 @ 09:40:52 am

    Well, with all due respect to you and Greenspan, I found the article to be nonsense. I am a mortgage broker and I can speak rather intelligently on the subject. I believe that Greenspan was skirting his own responsibility for the crisis with what amounts to intelligent sounding nonsense. China, globalization, an and everything else weren't nearly as responsible as his own outrageously low Fed Funds Rate drop to below 1%. This created the loose money that filtered into the mortgage market. Here is how I saw it. http://proprietornation.blogspot.com/2007/12/alan-greenspan-tries-to-rewrite-history.html Here is my full analysis of the roots and aftermath of the mortgage crisis... http://proprietornation.blogspot.com/2007/11/from-boon-to-crisis-truth-about.html

  • Jim Hensel
    Comment from: Jim Hensel
    12/14/07 @ 02:05:52 pm

    Got to agree with the first comment. It was clear long before Greenspan started raising rates that the sub %3 funds rate was too low, for too long. Then they started the 25bp rise was way too slow. In reaction to 9-11, %1 funds may have been justified but as soon as the economy stabilized funds rate should have risen to %3 in less than a year.

  • Ray Tapajna
    Comment from: Ray Tapajna
    01/08/08 @ 06:11:15 pm

    Greenspan is for the Free Market but it stops at the door of the Federal Reserve Bank and the World Bank. Then it becomes a monopoly game outside the will of the people. See Greenspan sells Greenspan in The Age of Turbulence at http://www.bizarrepolitics.com/