Does being a former Fed chairman mean never having to say you’re sorry?
In Oslo, Greenspan maintained that the housing bubble was not due to negative real interest rates in the US, but instead was a “global phenomenon.” He is thus arguing that housing price appreciation in various markets resulted from a common source that had nothing to do with the Fed, rather than being a concurrent phenomenon in a number of national markets. Note there was a similar housing boom and recession in the late 1980s and early 1990s, yet I don’t recall any central banker then trying to assign blame to mysterious global sources, say the gnome of Zurich, or in this case, excessive global liquidity spurred by access to nearly-free money in Japan (i.e,, the carry trade). But even if you accept that thesis, with negative real rates in the US, it was for a time a source of effectively free money as well.
Former Federal Reserve Chairman Alan Greenspan said he has “no particular regrets” and that the deepening slump in the U.S. housing market isn’t a result of his policies.
“Markets are becoming aware of the fact that the decline in house prices is not stopping,” Greenspan said today in Oslo. “I have no particular regrets. The housing bubble is not a reflection of what we did, as it is a global phenomenon.”…..
The collapse of the U.S. subprime market “was a shocker because no one expected it,” Greenspan said. “It was the weakest link in the international financial sector.”….
“The decline in subprime-financed housing starts is over,” Greenspan said. “It went to zero and can’t get any lower.”
Joseph Stiglitz, a Nobel Prize-winning economist, said Nov. 16 that there is a 50 percent chance that the U.S. will slide into a recession after the “mess” left by Greenspan. The retired Fed chairman defended his record in a statement released the same day, saying the criticisms were “inaccurate or incomplete.”
After the 2001 recession, the Fed cut its benchmark rate to a four-decade low of 1 percent. That move, along with a hands-off approach to regulation, has brought Greenspan under fire as the bursting of the housing bubble and the subprime mortgage crisis threaten to sink the economy.
“The fact that the Fed fund rate went down to 1 percent in 2002 was an important part of the latter stages of the housing boom,” said Bruce Kasman, chief economist at JPMorgan Securities Inc. “It wasn’t the only thing, and it wasn’t necessarily a bad thing. In the end, we’re going to look back at what happens next to recognize what the trade-offs were.”
Greenspan said on Nov. 7 there is a “less than 50-50” chance of a U.S. recession, reiterating remarks made in late October. He didn’t give a view on the chances today…..
“Stable prices are necessary for maximum sustainable economic growth,” Greenspan said. “To an extent that a weaker dollar is of such a magnitude that it creates serious problem, it needs to be addressed by policy makers.”
An interesting counterpoint to the Greenspan defense is Paul Krugman’s New York Times op-ed piece today, “Banks Gone Wild,” which mainly beefs about inflated pay to the CEOs who helped create this mess, but also has this comment:
This slump was both predictable and predicted. “These days,” I wrote in August 2005, “Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn’t seem like a sustainable lifestyle.” It wasn’t.
But even as the danger signs multiplied, Wall Street piled into bonds backed by dubious home mortgages. Most of the bad investments now shaking the financial world seem to have been made in the final frenzy of the housing bubble, or even after the bubble began to deflate.
In fact, according to Fortune, Merrill Lynch made its biggest purchases of bad debt in the first half of this year — after the subprime crisis had already become public knowledge.
Now the bill is coming due, and almost everyone — that is, almost everyone except the people responsible — is having to pay…..
How did things go so wrong?
Part of the answer is that people who should have been alert to the dangers, and taken precautionary measures, instead blithely assured Americans that everything was fine, and even encouraged them to take out risky mortgages. Yes, Alan Greenspan, that means you.