Greenspan Hid Fed Debate Over Housing Bubble to Keep Control

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Ryan Grim at Huffington Post has parsed recently released transcripts of 2004 Fed Open Market Committee discussions that show the debate over the rapid rise in housing prices and concerns about global imbalances were downplayed at Greenspan’s insistence. For instance, the minutes reveal that Fed governor from Atlanta, Jack Guynn, was worried about signs of real estate froth in his market in March:

…. a number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida. Entire condo projects and upscale residential lots are being pre-sold before any construction, with buyers freely admitting that they have no intention of occupying the units or building on the land but rather are counting on ‘flipping’ the properties–selling them quickly at higher prices.

The story also notes that (quelle surprise!) the official minutes softpedaled these worries:

Reports from some contacts suggested that speculative forces might be boosting housing demand in some parts of the country, with concomitant effects on prices, suggesting the possibility that house prices might be moving into the high end of the range that could be consistent with fundamentals.

Yves here. Translation: housing prices are still justified, if looking a bit rich. And note that this is March 2004, more a full year before leading edge conventional wisdom, as measured by The Economist pointing out the existence of a global housing bubble (in a June 2005 cover story).

Greenspan’s rationale was that the public’s involvement would be uninformed and unhelpful (gee, it didn’t occur to him that they might have more facts on the ground…):

We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.

Other Fed members raised concerns about overly low rates. Vice chairman Don Kohn was worried that lax interest rates were propping up housing prices; Cathy Minehan, head of the Boston Fed, worried about CPI increases in her region….driven by rising shelter costs. Geithner was concerned about possible financial imbalances.

June minutes showed more debate on this issue, with the Fed’s research director and vice chairman Roger Ferguson the worrywarts. There is also a discussion of what would not be called global imbalances (see p. 8-10 in particular, which discusses how much of a fall in the dollar might be necessary).

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  1. Francois T

    We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.

    Hmmm! Is there a polite way to characterize the author of this statement?

    [crickets chirping in the night, moon shadows extending their reach…]

    Nah! Not really!

    Hence, I’ll settle for arrogant fuckhead.

    1. DownSouth

      Greenspan was the maximum leader of the Libertarian-Austrian-Neoliberal Revolution, that is until it didn’t produce the free-market utopia their pat little theories predicted and the LANies excommunicated him.

      This is yet another way in which the LANies have shown themselves to be the mirror image of the communists:

      Stalin created some more ‘truth and historical concreteness’ by commissioning and overseeing a new history of the Revolution in which he was Lenin’s sole companion and heir. All photographs were doctored in order to remove any images of Trotsky or the other purged old Bolsheviks.
      –Victor Arwas, The Great Russian Utopia

      1. Haigh

        >>Greenspan was the maximum leader of the Libertarian-Austrian-Neoliberal

        Hardly, Greenspan was price fixing the most important price in the economy, interest rates. Free markets and price fixing are polar opposites. He qualifies as a hypocrite,nothing more.

        1. Skippy

          I revoke you[!] demonic raisins!

          Skippy…The randian cavalcade of the last 30 years is about to feel its own religious splintering…eh.

          PS. Great, more steeples of the cult, of I.

      2. Thomasina Jefferson

        Well said. Propaganda works the same way in all authoritarian regimes, regardless of the philosophy they are claiming to be based on. In that Stalinism, Naziism/Fascism or Capitalism are on equal footing.

    2. anon

      I’ll settle for stunted adolescence.

      God help us. He thought he was the embodiment of Atlas Shrugged. In truth he is the embodiment of Lord of the Flies.

      How does Andrea Mitcehell show her face on TV?

  2. attempter

    We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.

    All these criminals always claim to believe in and even exalt “democracy”, yet their actions always assault it and imply (or in this case explicate) contempt for it.

    Needless to say, it’s incoherent to even believe in democracy yet think there are large realms of policy where the people aren’t qualified to even participate in the discourse, let alone make the decision.

    I sometimes wonder what’s the ratio of cognitive dissonance on this score vs. rank cynicism. Does a criminal like Obama truly consciously think he’s a (small-d) democrat at all? His actions prove he’s not, and that he really opposes democracy. The same for all elites.

    1. DownSouth

      In Chile, the socialist government of Salvador Allende was overthrown in 1973 by a military coup headed by General August Pinochet. In a savage action, Allende partisans were rounded up, gathered in a stadium, and murdered en masse. Others were sent to concentration camps, and still others were exiled and sometimes murdered abroad. Pinochet did all of this in the name of democracy and anticommunism.
      –Carlos Fuentes, The Buried Mirror

      Like Friedman, Hayek glimpsed in Pinochet the avatar of true freedom, who would rule as a dictator only for a “transitional period,” only as long as needed to reverse decades of state regulation. “My personal preference,” he told a Chilean interviewer, “leans toward a liberal dictatorship rather than toward a democratic government devoid of liberalism.”

      1. Skippy

        Yep any cleansing done to effect generational shift/take out the opposition/no debate, is OKAY DOO[KAY with the property is *I* crowd so lick my boot for your breakfast gang. Until some one else tries that trick with out inviting them to the afterwards feast.

        Skippy…BTW PM K. Rudd just announced a 40% tax (after R&D/Capital expenditure) on the mining sector over here, as the resources of this country belong to the people, and they should benefit.

        Watch the shit fly see:;topic=1643.0

        1. liberal

          …as the resources of this country belong to the people…

          But that’s actually the entire problem in a nutshell.

          Faux libertarians, really quasi-feudalists, don’t understand the difference between returns to land and other natural resources and returns to capital. The latter justly belongs to the owner of the capital, but the former belongs to the people.

  3. attempter

    I forgot to add – if “complexity” ever were really necessary and really brought us to the point where democracy was no longer tenable, look at how everyone assumes it’s democracy that has to go.

    Never the vile money-grubbing and chickenhawk war-mongering.

  4. abelenkpe

    Petty control freaks and criminals run the economy and we’re poisoning the ocean.
    Got it.

    Any good news out there today?

    1. Ghost of Joe

      Good news from Boston. Two million people are about to get access to public potable water again. In a day. Or so. Maybe. They think. Probably. Maybe.

  5. Wallyz

    The unasked, and perhaps unanswerable question is- was Greenspan working for the Hedge funds during this time-span, or the Government? Was he intentionally trying to increase volatility, or was he trying to keep the economy booming to increase tax revenues to help pay for tax cuts/wars? Either way, this is a criminal act.

    1. alex

      “was Greenspan working for the Hedge funds during this time-span, or the Government?”

      There’s a difference?

    2. Doug Terpstra

      Excellent question. Yves and others have noted the fishy fact that hedgehog Paulson & Company (which made billions courtesy of GS (alleged) fraud shorting CDOs) hired Greenspan as exclusive advisor for an ‘undisclosed amount’, in January ’08, shortly after his “retirement”. Greenspan really should be part of a wider investigation by the SEC and the DOJ that includes Paulson, Magnetar, and many other players.

      1. anon

        I’m not a conspiracy nut by nature (just a nut), but..

        If Paulson was, by most recent accounts, a bit player before his spectactular coup,

        then how did he land such a prize as Mr. G?

        It’s dawning on me that Greenspan really is demonic. Till recently, I just thought he was mad, Randian mad, but not really perverse. I’m having second thoughts and I’m truly horrified.

    3. carping demon

      He was working for the same person we all work for, himself, at the same task we all work at, i.e., to square his life as lived with the ideals he held. What helped foster the financial crisis was that society has no recognized procedures for dealing with people who are trying to live according to destructive ideals. That’s one of the problems with principles-based vs rules-based regulation. He was working with the wrong principles, and there weren’t the right rules to stop him.

      1. steelhead23

        This issue deserves more play. I suspect that GS could win its SEC lawsuit on “technicalities” – as in they didn’t commit fraud because they percieved their job to be a market-maker, particularly if they opt for a jury trial wherein sharp lawyers could make the government look foolish and vindictive. But if viewed at a distance, without focusing on rules and regs, it is clear that GS “intended to decieve” which is enough in some countries to get one convicted of fraud. GS should hope they don’t get tried in London.

        As regards Greedspan, Waxman already got him to admit his guilt. He awaits sentencing. The issue before us is should the Fed be audited. The answer is: beyond a shadow of a doubt, audit the Fed. But also, investigate the Fed, the SEC and Treasury – then Fannie and Freddie. There has been enough funny dealing in those agencies to make it clear to the most casual observer that they have been captured by the industry they serve, er, I mean regulate.

  6. ChrisPacific

    That only we fully understand?

    A statement like this should be grounds for immediate dismissal of someone in his position. To suggest that any real world economic problem of any significance can be “fully understood” by anyone given the predictive accuracy of the current economic theory strikes me as dangerously naive at best, and delusional at worst. If anyone needs confirmation that economics as it’s currently practiced by those in power is not a science, look no further than this quote. When was the last time you heard a scientist claim they fully understood anything?

    On another note, as I write this there is a banner ad right below my cursor for a property investing newsletter. (Huge profits on small deals! No cash down!) Sounds like we may get to do this all over again soon.

    1. aet

      Perhaps it is because only “they” have the infiormation and data which allows accuracy of description and thus function.
      If you don’t have accurate raw data, you cannot have anything worthwhile to say, as to any particular specific situation.

      “That only we understand” = “that only we have he data to understand”?

      1. aet

        PS Apologies for atrocious grammar and spelling: my browser’s fonts are messed up – I cannot properly edit my comments.
        Apologies, again.

      2. ChrisPacific

        Possibly that’s what he meant. But if he did, there were ways he could have said it that would have been much less subject to misinterpretation. Remember, this was a man who was used to parsing his utterances for the public record.

  7. alex

    This is incredibly damning. I’ve long criticized Greenspan (and Bernanke) for not recognizing the housing bubble. A common rebuttal was that they recognized it but chose not to do anything about it. Looks like that was true. Of course that’s even worse than not recognizing it. Incompetence is forgivable (albeit not grounds for reappointment) but deception is culpable.

  8. Andrew

    If there’s any justice in the world (a silly notion, I know) “that only we fully understand” will take its place alongside Irving Fisher’s “Stock prices have reached what looks like a permanently high plateau” in 1929.

    Has there ever been an economist whose reputation has fallen further, faster, from what looked like a permanently high plateau?

    1. The humanity

      To Fisher’s credit, he saw the error of his ways and spent the rest of his life trying to learn from and make up for them. I don’t see Bubbles choosing that path

  9. gordon

    “We run the risk … of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand”.

    This is the pure faith of the technocrat. See J.R.Saul’s “Voltaire’s Bastards” for extended discussion.

    For such people, the inability of the technocrats at the Federal Reserve to handle the collapse of the housing bubble and subsequent collapse of banking was the really scary thing. Governments, with all their political baggage, had to become involved. Very bad news indeed.

    1. The humanity

      “We run the risk … of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand”.

      If that quote doesn’t put the lie to Greenspan’s purported faith in the Efficient Markets Hypothesis, I don’t know what does.

      1. JTFaraday

        Maybe he’s not primarily driven by an economic ideology, but is more of a technical manipulator, out to deliver specific short term results for specific actors.

        I read somewhere–or maybe they were joking about it on CNBC–that Greenspan said any time he went into Congress he would just dodge all the questions because they were too stupid anyway.

        Why does Congress need to know what he’s up to?

  10. Doug Terpstra

    Yves writes, “Greenspan’s rationale was that the public’s involvement would be uninformed and unhelpful (gee, it didn’t occur to him that they might have more facts on the ground…)”

    Spoken like a true, arrogant Randian. We can’t have the rabble interfering in our scam.

    A while after reading ECONNED,

    1. Doug Terpstra

      as I was saying before so rudely interrupting myself…

      a while after reading ECONNED, I revisited Appendix II, “How to Short Subprime in Large Quantities” and realize how eerie it is that Goldman followed Yves’ formula to a tee—uncanny.

      “In what happens after the meltdown”, Yves chronology ends thus:

      “9. The US Treasury decides that Dealer is systemically important and puts him on life support.”

      “10.Subprime borroweres blow up. CDO blows up. Monoline blows up. Shadow banking system implodes. International capital markets lock solid. U.S. public debt balloons. Greenspan spots flaw in “free markets” ideology.”

      For the next printing, I would humbly suggest modifying the final step:

      “11. Hedgie buys a Pacific Island and a yacht [, pays off Greenspan with gravy consulting fee] and sails off into the sunset.”

      1. aet

        Soon perhaps to end up like Captain Cook, once some unhappy islanders get their paws on ’em.

  11. scraping_by

    It’s an interesting, and not entirely academic, question: did these pinheads believe their own bullshit?

    On the pro side is our traditional American tolerance for idealism, and indeed, this was presented as ideology. It was turning the tokens in a Glass Bead Game into daily policy. So we had a new religion in the land of the First Amendment.

    On the anti side, read One Market Under God: Extreme Capitalism, Market Populism, and the End of Economic Democracy. Thomas Frank does a very good job of following the public relations campaign that transformed insider trading into Democracy and income inequality into Prosperity. In other words, they watched the smoke screen being stoked.

    So the question: when these Important People watched American economics being transformed into “Private good! Public bad!” did they bleat along?

  12. Paul Tioxon

    Does the Fed have a smoke filled back room full of deal making South Philly, Harlem and Chicago wardleaders? Just wondering.

    1. run75441


      Chicago aldermen and Ward Bosses deal with reality and live by their decisions. Greenspan has yet to touch the reality of his decisions. How one man can cause so much damage to 300 million others is beyond belief

      1. psychohistorian

        Just a bit narrow minded there dude. 300 million is just the population of the US. How many people live under the auspices of having the American dollar as their Reserve Currency? Just us here on the earth is all.

        Ours is the gift that keeps on giving… the rich.

  13. TimC

    Hmm – Isn’t the efficient market hypothesis predicated on market participants having perfect access to information? Under competition individuals and firms only make efficient decisions on consumption and allocation of capital when information is transparent and readily available.

    Maybe Al never took Econ in college?

    Or maybe he was secretly hankering for a command economy?

    1. aet

      NB: “akin to” does NOT mean “equals”.
      Historians know well the value of unsupported assumptions.

  14. markovich

    Where are the discussions about the Net Capital change at the SEC in 2004? Where are the FBI front page warnings of mortgage fraud in 2004?

    I think we’ll have to wait for the uncorrected raw transcripts on the 30 year delay.


  15. Markovich


    You should lead a charge to get the Jan 2005 transcripts now. They’re 5 years old. The Fed plays games with their transcript releases. There should be no delay, as at the Supreme court, including of dissenting voices inside the FED. This institution is corrupt (just by sunshine standards) and doesn’t belongs in a democracy. We dissenting voices have been saying for years that Alan Greenspan was golden calf who would be melted for his weight when it was over. But, it should have never got this far. Democracy isn’t functioning in terms of central banking. This is a FACT we have to realize before it’s really too late.

  16. Jim

    The Greenspan comment raises the broader issue of knowledge as power. One of the reasons I no longer get excited about the traditional “left” “right” divide is that it no longer seems to capture a key emerging division in American society.

    Intellectuals and technocrats have their feet in both the traditional left and traditional right political movements as well as within the leading institutions in both the public and private sectors.

    The old class distinctions are being replaced with a new set privileging intellectual capacities combined with the assumption that greater intelligence implies a de facto natural claim on greater power (i.e. “loss of control of a process only we fully understand”).

    Intellectuals always represent the interests of other groups as they define and interpret them while having a special vested interest in their own education and knowledge.

    It is important to remember that intellectuals never seek power in their own name. Whether giving their allegiance to the market or the state, they will make universalist claims to mask their particularist interests while attempting to remake society in their own image.

    It may be no accident that culturally our society today is often described as a meritocracy rather than a democracy.

    1. attempter

      I think this is basically right, though I’d add that the term “meritocracy” is just as much a scam as “democracy”. The practice of wingnut welfare is the radical opposite of true meritocracy, where there would be severe penalties for crime and for failure on account of incompetence and willful ignorance. This kleptocracy, on the other hand, rewards all three.

      But I don’t understand statements like this:

      Intellectuals and technocrats have their feet in both the traditional left and traditional right political movements as well as within the leading institutions in both the public and private sectors.

      1. Where, anywhere in America, does there still exist any remnant of the traditional left at all?

      2. In what way do today’s corporatist intellectuals and technocrats support any element of public interest policy or fairness in wealth and power distribution? On the contrary, they support corporate racketeering at each and every point.

      If you want to say old terminology and configurations no longer work very well, I agree with that. I always say the defining struggle of the age, which defines all other issues, is freedom vs. corporatism. Certainly that renders many of the old fault lines maladaptive, and ought to render them moot.

      But it’s simply counterfactual and in practice abets the still-dangerous “traditional right” to pretend that it didn’t completely triumph in terms of imposing its ideology upon the polity. Both Washington parties are right-wing parties, and the MSM is right-leaning. The universities are broadly corporatized.

      That’s why we’re in the corporatist mess we’re in. The only thing that’s prevented the right from achieving in practice its “permanent majority” is its own incompetence and manifest, grotesque criminality, which has acted to repel voters.

      There’s certainly no “left” resisting it.

    2. aet

      The degree of technical expertise and sophistication both required and produced by our technologies dictates that tho only those who are competent can operate the machinery, or design that machinery.

      Thus, in engineering, objective standards leads to a “meritocratic” organization.
      Or in sailing, or in any endeavor wherein both specialized expertise and experience are valuable to success.

      But this has nothing whatsoever to do with politics, which demands other less technical considerations: mor of the heart, than just the head and hand.
      For society includes all of our idiots, all of our dieing, all of our wasting and weak.
      And they, each and every one of them, is of no less “value” than the most accomplished technocrat.
      That is democracy: that no matter what their station, a citizen may make his views and opinions known to others.
      But it is also democracy, that people shall decide: and that some shall be disappointed that their counsels went unheeded, or rejected.

  17. almostinfamous

    We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.

    smells like malfeasance to me – can’t this be used to lay out a criminal case?

    1. aet

      A man gains his first measure of knowledge when he honestly admits his ignorance.

      Stupidity (ie “we fully understand X”) is no crime.
      But when joined to Power, it may be negligent: and hence worthy of censure.

      1. aet

        Negligent – of the welfare of the individuals who make up one’s society, the public welfare.

        Oh right: in Greenspan’s view, such a concept is considered to be intellectually inchoate. “Public welfare” is an illusion: only the “private welfare” of the very rich “really” counts, if one “fully understands” greenspan’s ideology.

        What is the corollary of such a belief, when it comes to considering the value to be accorded to of democratic norms and values?

        That such “forms” are to be used for propaganda
        purposes only, I think ; for purposes of herding and control.

        Think: what makes you, or would make you, happy?
        And how did you come to think that?
        The messages in the mass media shape your thinking about that?

  18. markovich

    LOL. You could ask if his only hedge fund client, John Paulson, was also one that ‘fully understood’ the bubble/bust or did Greenspan himself impart this full understanding to Paulson?

    good questions all

  19. Lucy Honeychurch

    “We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.”

    I see many characterizations of this Greenspan quote (arrogant, captured by their own ideology, malfeasance, etc…)

    I think it’s a circular, self-fulfilling argument.

    How can the people possibly ‘join in on the debate’ if the facts that ‘only [they] fully understand’ are not disclosed and discussed publicly by our #1 Advice-Givers on such matters?

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