By Mike Whitney
09/17/07 "ICH" --- - Alan Greenspan’s appearance on 60 Minutes was preceded with all the pomp and ceremony of a royal wedding. The public relations blitz dragged out for a whole week.
What profound truisms would the elusive former-fed master divulge to the News Magazine’s withered-coquette, Leslie Stahl? Would he produce his crystal ball and forecast America’s blurry economic future in mangled Fed-speak? Or would he focus on the startling gyrations in the stock market and the “frothy” conditions in the slumping housing market? The suspense was nearly unbearable.
“Why didn’t you stop the illegal or shady practices you knew were taking place in subprime lending?” Stahl inquired.
“Err, I had no notion of how significant these practices had become until very late. I didn’t really get it until late 2005 and 2006”, Greenspan replied nervously adjusting his tie.
Hmmmmm. That’s not exactly true, Maestro. In fact, here’s what Greenspan said as chairman at the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Washington, D.C. April 8, 2005.
“Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advance in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers.”
Sounds like a ringing endorsement of subprime lending to me.
Greenspan also brushed aside Stahl’s claim that the Fed chief was warned by other members of the Central Bank (Edward Gramlich) about the dangers of subprime lending.
“We were not capable” of doing (regulating) that.” Greenspan protested while emitting a slight-gurgling sound.
Greenspan doesn’t accept any blame for keeping interest rates at historic lows and inflating the credit and housing bubbles which are now crashing to earth. He was simply "doing his job" according to sound economic principles.
Baloney. What a grim performance by the world’s greatest serial bubble-maker.
“It was our job to unfreeze the American banking system if we wanted the economy to function. This required keeping interest rates modestly low,” Greenspan opined.
“Modestly low”?!?
1% interest rates are modestly low? It's a cash giveaway designed to boost speculation.
Greenspan did nothing while mortgage lenders were doling out trillions of low-interest candy to subprime applicants with bad credit, no documentation of earnings, no collateral and, sometimes, no job!
Is that prudent lending?
Greenspan put this economy-busting juggernaut in motion and then dumped the whole mess in Bernanke’s lap.
What-a guy!
Listen to Greenspan on the subject of toxic CDOs (Collateralized Debt Obligations) which have infected the stock market, triggered bank closings, and frozen the commercial paper market.
Greenspan:
“The development of a broad-based secondary market for mortgage loans also greatly expanded consumer access to credit. By reducing the risk of making long-term, fixed-rate loans and ensuring liquidity for mortgage lenders, the secondary market helped stimulate widespread competition in the mortgage business. The mortgage-backed security helped create a national and even an international market for mortgages, and market support for a wider variety of home mortgage loan products became commonplace. This led to securitization of a variety of other consumer loan products, such as auto and credit card loans.”
Another ringing endorsement, right?
The best summary of Greenspan’s tenure at the Fed was written by economist and author Henry C K Liu in his article “Why the Subprime Bust will Spread”. Liu says:
“Greenspan presided over the greatest expansion of speculative finance in history, including a trillion-dollar hedge-fund industry, bloated Wall Street-firm balance sheets approaching $2 trillion, a $3.3 trillion repo (repurchase agreement) market, and a global derivatives market with notional values surpassing an unfathomable $220 trillion.
On Greenspan's 18-year watch, assets of US government-sponsored enterprises (GSEs) ballooned 830%, from $346 billion to $2.872 trillion. GSEs are financing entities created by the US Congress to fund subsidized loans to certain groups of borrowers such as middle- and low-income homeowners, farmers and students. Agency mortgage-backed securities (MBSs) surged 670% to $3.55 trillion. Outstanding asset-backed securities (ABSs) exploded from $75 billion to more than $2.7 trillion.”( Henry Liu, “Why the Subprime Bust will Spread”, Asia Times)
"The greatest expansion of speculative finance in history". That says it all.
Of course, the housing bubble isn’t ALL Greenspan’s responsibility. He had a lot of help from greedy speculators who thought they could get rich on someone else’s money. Jim Kunstler’s latest blog-entry, “SHOCKED, SHOCKED” puts it like this:
“But the really funny part of all this is that the media columnists are acting as though the American public got hoodwinked by Al. Which raises the question: just what the fuck was the public thinking when they bought half-million dollar houses on salaries under 60-K, taking out no-money-down, interest-optional balloon mortgages and other tricked-up contracts? The answer is: they walked into these arrangements with their eyes open because they thought they could get something for nothing. They thought the trend of steeply rising house prices would continue indefinitely and enable them to wiggle free of any hazard by flipping their houses to an endless supply of greater fools who would be there waiting to turn the very same trick. And the smoothies downstream in the mortgage and banking rackets were no less guided by avarice when they cooked up their formulas for bundling half-baked mortgages into tranches of tradeable securities. Easy Al may have failed to notice what was going on here, but then so did everybody else from The Wall Street Journal to the Securities and Exchange Commission.”
This, of course, represents an insidious psychology. It could only happen in a culture that has come off the rails mentally, so to speak, as ours has in the sense that nobody has any sense of consequence, neither the leaders nor those who affect to follow the leaders". (Jim Kunstler, “SHOCKED, SHOCKED")
Kunstler’s right. Everyone was only-too-happy to play along as long as there was easy money to be made. No one pondered the ethical questions or the long-term effects on America’s economic future.
Then the music stopped, housing plummeted and the stock market began its downward death-spiral.
No one is laughing now.
Still---even though there’s blame enough for everyone---it still irks us that the wizened former Fed-chief is using his ill-deserved fame to traipse around the country plugging his new book, "The Age of Turbulence", while blasting Bush for the policies he authored.
Here’s another risible quote from Maestro on the wisdom of loaning to people with bad credit:
“Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to the rapid growth in subprime mortgage lending…fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”
Improved access to credit for consumers, and especially these more-recent developments, has had significant benefits”.
Oh, yeah----“subprime mortgage lending” has “had significant benefits” all right. It’s nearly bankrupt the country and driven millions of people out of their homes and into the streets. Any more “benefits” and we’ll all be lining up for handouts at the halfway house.
Probably the most damning indictment of Greenspan appeared today in the Wall Street Journal in an editorial “The Fed’s Alibi”. It states:
“The Fed's easy money policies helped cause the housing bubble and subprime crisis, and now it's being asked to solve them with more of the same. (rate cuts)…
“The "Maestro" is far less persuasive in his explanation for why the Fed kept money so easy for so long. He says it was to "shut down the possibility of corrosive deflation." But fear of deflation was long gone by the third quarter of 2003, after the second round of Bush tax cuts had passed and GDP growth clocked in at 7.2% on an annual basis. The Fed nonetheless maintained negative real interest rates for many more months to come. This has proven to be the great policy blunder of Mr. Greenspan's tenure, with ramifications that are making life difficult for Mr. Bernanke today.”
Ahh, yes; now even the far-right Wall Street Journal has fingered Greenspan as the guy who manufactured the biggest equity bubble in history and left the nation hobbling towards disaster.
Thanks, Alan. I hope book sales are brisk.
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