Call to ARMs

Alan Abelson hits on a favorite theme of ours: Bad financial advice given by a certain former Federal Reerve Chairman:

"ANYONE KNOW A GOOD LAWYER? Before you accuse us of cavalierly perpetrating an odious oxymoron, rest assured we’re using "good" in the sense of professional superiority, certainly not moral rectitude. And what inspires our request is we’re trying to prepare for a flood of requests from angry readers hot to sue Alan Greenspan.

Be assured as well that we would earnestly seek to discourage such action. For one thing, Mr. Greenspan is a well-meaning and gentle soul, known far and wide for his generosity (they don’t call him Accommodating Al for nothing). For another, as the New York Times reported last week, chasing ambulances is already a lavishly rewarding occupation. More so, for sure, than tending to the unfortunates being hauled to hospitals in those ambulances, as evidenced by a study that found lawyers’ incomes between 1995 and 2003 rose 7%, while your average sawbones over that same stretch suffered a 7% decline in his take-home pay.

But the incontrovertible if sad truth is that Mr. Greenspan did offer financial advice using, what’s more, the bully platform of a congressional hearing to make his pitch.

And the even sadder truth is that any innocent who chose to follow his advice is now the poorer for having done so. That Mr. Greenspan has recently received a huge advance for a book on his life and happy times as a famous economist and revered civil servant is, alas, a cinch to only whet already ravenous litigious appetites.

More specifically, Mr. G stands guilty of committing a capital crime several years back by regaling the peasants, who considered his every word a divine utterance, on the joys of adjustable-rate mortgages (as opposed to the old stodgy fixed-rate variety).

As it happened, he couldn’t have picked a worse moment to make what Stephanie Pomboy of MacroMavens nicely dubs his "call to ARMs." Yields were their lowest in 40 years, but poised to begin a remorseless climb up the slippery slope.

The masses who rushed to follow the master’s advice are only now starting to feel the pain of their folly. Stephanie reckons that some $1 trillion of adjustable-rate mortgages are due to be reset this year and another $1.7 trillion next. In the event, legions of homeowners will have to cough up 25% more every month and, for some, the bite will be as much as 60% greater…

Note that we made the same observation (in 2004) about this horrific advice.  Back to Abelson:

Much as we sympathize with their plight, the hapless borrowers have only themselves to blame for failing to perform sufficient due diligence before acting on Mr. G’s urgings. Had they made even a cursory effort to take his measure, they would have known better. For though not always wrong on his projections or wildly off on his timing (he isn’t, after all, a financial journalist), he invariably has been wrong on the big ones. The only thing worse than his misdiagnoses have been his proposed remedies, which consisted mostly of the same old snake oil of easy money and easier credit. He was always ready with a fix, never with a cure.

Most notably, he lost his nerve when confronted by a runaway stock market and what to do about it. His politically correct but economically inane answer was essentially…nothing. When equities inevitably came back to earth with a horrible thud, he sought to distract us simple folk from the smoking ruins by creating the greatest housing bubble since shelter-seeking man first crawled out of his dank cave.

Now, that bubble’s losing air rapidly and bad stuff is beginning to happen. Mr. Greenspan has fortuitously or craftily — or both — slipped out of the line of fire and, presumably, is busily scribbling away, offering, as the key player, his priceless perspective on the great bull markets in stocks and houses. (The perspective may be priceless but, the book will probably, depending on length, go for close to 30 bucks a copy, with the usual discount at Barnes & Noble.) We can hardly wait to read his account. But, then, we’re a real sucker for anything with a financial theme, especially fiction."

We couldn’t agree more — we have hit upon quite similar themes several times. First, in Ignore the Cheerleader-in-Chief (If no RM, see this) and more recently, in Myths of the Greenspan Era.

Consider the following fed chief foibles which w ehave pointed out in the past:

• October 8, 2004 "The impact of the current surge in oil prices, though noticeable, is
likely to prove less consequential to economic growth and inflation
than in the 1970s." 
-Speech to National Italian American Foundation in Wash, D.C., Federal Reserve Chairman Alan Greenspan said he’s not worried by the rise of crude oil prices to a record $55 a barrel.

• July 20, 2004: Rising energy prices "should prove short-lived"; crude prices have risen nearly doubled since then.
-Testimony before Congress

• May 2003, Greenspan warned of potential Natural gas shortages; prices tumbled shortly thereafter on increased supplies.

• Summer 2004: His advice to would-be home owners, praising the virtues of adjustable-rate mortgages when fixed-rate loans were near half-century lows.

These are but a few of his calls; If you see a pattern, give yourself a gold star . . . or better yet, just buy some gold, as his easy money policies are the reasont he metal has doubled over the past 5 years.



Call to ARMs
Alan Abelson
Barron’s MONDAY, JUNE 26, 2006

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What's been said:

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  1. Paul Jones commented on Jun 24

    Another political utterance by Greenspan that will cost us dearly is his cheerleading of Bush’s tax cuts before the GOP got control of spending. It is akin to the call for amnesty for those illegals who are already here with out first securing the border. It doesn’t shock me that New World Order folk like Bush and Greenspan support these policies; what suprises me is that rank-and-file conservatives so blindly follow along.

  2. jpj commented on Jun 24

    the GOP has control of spending ????? higher now than ever

  3. drey commented on Jun 24

    I had some things to do this morning but I believe I will put them aside for a few hours to ponder how anyone who lives in this particular universe could come to the conclusion that THE GOP HAS CONTROL OF SPENDING.

    That is truly a mind boggling statement.

  4. DavidB commented on Jun 24

    of course the GOP has control of spending

    ….they spend better and more efficiently now than ever before!

  5. spencer commented on Jun 24

    If he had never been fed chairman he would be remembered for his “WIN” buttons to Whip Inflation Now just as the economy was plunging into its most severe post war recession.

  6. knzn commented on Jun 24

    I don’t see the problem with the “October 8, 2004” statement. The impact of the surge in oil prices has, so far, proven far less consequential to economic growth and inflation than in the 1970s. In the 1970s, two years after the first major oil price increases, we were deep in the worst recession (as of that time) since the 1930s, and inflation was nearing double digits. Here now we are 4 1/2 years into the oil bull market, inflation is below 5%, the unemployment rate is at a low for the cycle, and growth has run better than 3% year in and year out. This is not to say that there aren’t problems, but if you want to challenge Greenspan’s statement, the best you can do is to issue a forecast and assert that your forecast will yet come to pass and disprove Greenspan.

    The ARM thing, though, is positively bizarre. Even if one expected rates to stay low, it was clearly imprudent to suggest that homeowners become interest rate speculators. I’ve come to be rather fond of Greenspan in general, but in that particular case, he seems to have taken leave of his senses.

  7. Lord commented on Jun 24

    ISFAIR, Greenspan was talking about the advantage of ARMs in the past, which they were, but hindsight is always 20/20.

  8. kkn commented on Jun 24

    anyone with an ARMS who is forced to re-set can now get 6.7% , still better than most mortgages of the past 25 years….. not a disaster

  9. wcw commented on Jun 24

    “Not a disaster” is a pretty backhanded compliment. I’d say it effectively grants the original assertion.

    In re: Greenspan, I will give him credit for his monetary work. Prices have not run away since he took over from Volcker, the original inflation hawk, employment has never been worse than mediocre, and neither 1987 nor LTCM resulted in a network cascade in the financial markets.

    However, I hold several things against him with great prejudice. Using his bully pulpit to stump for the GWB tax cuts and punch a 4%-of-GDP hole in the budget is merely the latest and greatest. He also led the ‘Greenspan Commission’ under Reagan that ‘solved’ (cough) the social-security problem by raising taxes on the little guy — think of him every time you see that bite off your pay stub, and remember half that tax is hidden.

    As a banker, he wasn’t bad at all. As a policymaker, he’s always showed the Randian impulse to steal from the poor and give to the rich. Aside from its fundamental immorality, that makes for awful public policy.

  10. KirkH commented on Jun 24

    kkn, it is a disaster because 5-10 years ago you had a higher rate on a house that cost half as much. 6.7% on $1,000,000 is a bigger monthly payment than 10% on $500,000.

  11. ccv commented on Jun 24

    if you guys think 6.7% is a disaster ………

  12. ffv commented on Jun 24

    Alan Abelson ……. Mister Positive , can find the cloud in any silver lining … talk about a guy who selectively uses data to support his point of view …. he makes some of these posts look like they’re the work of academmics

  13. mlong commented on Jun 24

    I think you overwhelmed Charles’ site. I get this message: The server is temporarily unable to service your request due to the site owner reaching his/her bandwidth limit. Please try again later.

  14. Bob A commented on Jun 24

    You would think Greenspan was on the payroll of World Savings, where at sales meetings pumping their one-month adjustable arm’s they used to get a huge laugh about how the consumer, given the option, would almost always choose the lowest payment available (negative amortization). Those poor folks who got a World Savings CODI or COFI arm two-three years ago have seen their minimum payment go up around 50% since.
    Washington Mutual and everybody else caught on and started pumping these loans after Greenspan gave the ‘all clear’ and rates started rising. Talk about the ‘PPT’ or ‘Profiteering Protection Team’.

  15. Bob A commented on Jun 24

    Q. Who said this on CNBC a couple years back? “Greenspan is an idiot”.

  16. Bob A commented on Jun 24

    A. That would be Jim Rogers who was also at the time very correctly predicting a coming rise in commodities.

  17. jm commented on Jun 24

    the same Jim Rogers who left Quantum in 1980 only to see his former partner make $10B , while his wealth stagnated @ $100M………

  18. ghj commented on Jun 24

    “Whether oil production is up five or six per cent is pretty meaningless ……… Russia’s a hopeless place to invest.”
    Jim Rogers

  19. sb22 commented on Jun 24

    natural gas prices rose $15/mm btu in Dec., how does that jibe w/ Greenies comments on shortages….. seems pretty good

  20. bnm commented on Jun 24

    oil’s not been as much of an economic impediment in 2004 , 2005 or 2006 vs. the 1970’s …… that seems right also

  21. brian commented on Jun 24

    “…Another political utterance by Greenspan that will cost us dearly is his cheerleading of Bush’s tax cuts before the GOP got control of spending…”

    in PaulJones defense, I think what he meant was that the GOP *should have* gotten control of spending before cutting taxes…
    (however there were/are just too many fat palms needing further grease as well as all those “Pioneers” to compensate…)

  22. angryinch commented on Jun 24

    Greenspan was America’s bartender. His job was to listen to customer’s stories and pour the drinks.

    You are right, Barry. Greenspan has nearly an unbroken record of being dead wrong at inflection points. The “call to ARMs” and natural gas predictions are just the latest in a long line of wrong-way calls.

    How this guy is known as “The Maestro” is beyond me. But who doesn’t like bartenders? I think a better title would be “The Maitre D'”.

    Here’s a few Greenspanisms:

    “It is very rare that you can be as unqualifiedly bullish as you can be right now.”—Alan Greenspan, Jan 7, 1973, two days after the market peaked on its way to a 50% decline over the following 2 years.

    “Bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong.”—Alan Greenspan, June 1999

    “The fact that the capital spending boom is still going strong indicates businesses continue to find a wide array of high-rate-of-return, productivity-enhancing investments. I see nothing to suggest these opportunities will peter out any time soon.”—Alan Greenspan, March 8, 2000.

    Not to mention his very public defenses of the S&L industry—which he did a lot of consulting work for—right before the 1980s carnage.

  23. jcf commented on Jun 24

    One of the problems with ARMs is that buyers are often qualified at the first-year’s rate, which can be well below the current market. When the rates rise, especially with no increase in household income, they may be markedly unqualified vis-a-vis percentage of take-home pay necessary for mortgage payments.

  24. Bob A commented on Jun 25

    “anyone with an ARMS who is forced to re-set can now get 6.7% , still better than most mortgages of the past 25 years….. not a disaster”.
    No. Not anyone. The problem with this is that at that many or most of these consumers took out 80/20 loans… 100 loan-to-value. Unless their property has increased in value, they do not qualify for new loans or if they do, only at much higher rates.. Their out? Default. Move into a rental that costs them 50% of what they are currently paying in interest.

  25. Jon H commented on Jun 25

    The only explanation that makes any sense is that Greenspan was doing a big favor for his lender friends.

  26. Brian commented on Jun 25

    Why is it that Greenspan says there is no way to identify a bubble in advance, but then he tells us that housing is not a bubble?

  27. muckdog commented on Jun 25

    You know, I haven’t seen folks dramatically affected by spending $50 to fill up their tanks instead of $30. I suppose it’s an extra $80 a month for folks. To adjust, maybe they get the small mocha instead of the large mocha, make an extra meal or two per week at home instead of going out, or spend a little less at Home Depot every month. I don’t know. It doesn’t seem to be a big deal for most.

  28. muckdog commented on Jun 25

    Interest rates are still low, but the folks who could only qualify for loans because of 1% negatively amortized teasers will be hurting when those adjust to current rates. Those were the folks “last in” to the bubble. AKA, the greater fools.

  29. Cherry commented on Jun 25

    Oil is the most overhyped phenom of the last 5 years. The 70’s “oil shocks” were rises in the price of Oil WAY up over inflation in a short period of time. It wasn’t like Oil going from 30 barrells to 70 barrells overnight ala 73’s level of spike. Lets say that Oil went from 70 barrells to 110 in a month. That my friends is a Oil shock. We have not had that. Thus going from 30-70 over 2 years is essentially adjusted for inflation due to all this liquidity, that is also why Oil prices will not dip much either to the massive speculatory bubble collapses. So to the poster that said going from 30 to 50 dollars wasn’t bothering them, tell them that by Augest 1st, that will go up from 50 to 125. You think they would still be happy? But alas………..

    The main problem is the massive speculatory bubble and its nasty boil, the Real Estate bubble.

    A major correction is nearing on the financial, equity and price varient standpoints, major deflation, which will challenge the world’s systems. Failure in 1929 to control the damage led to the depressions of all depressions. Failure to do again will lead to the same demise though this time it is one market crashing down around the other in a mass global speculatory bubble. A brutal twilight into the bleak depths.

    Greenspan helped suck what was left of this era and he knew EXACTLY what was coming and got out before it turned cold.

    America will be profoundly changed by this coming “change of the guard”. Much like Japan of the early 90’s, cultural changes that lead from spenders to savers will effect the country and end the perversion of lust, greed and decadence of the last 10 years.

  30. D. commented on Jun 25


    I agree but I do think the real estate bubble has helped dampen the effect of oil prices.

    Let’s consider that each household is spending minimum 100$ more per month than a few years ago on gas. That means 1200$ per year. With 100M million households, that means 120B$.

    A few years ago, households were extracting less than 100B$ per year in their homes. Now they’re extracting 500B $. IMO, that 500B$ is subsidizing a good chunk of the oil price increase and households don’t realize it.

    As real estate prices stop going up, equity extractions will go back down towards 100B and unless oil prices correct, households will start feeling the pinch.

  31. Eye Doc commented on Jun 25


    Jim Roger’s income “stagnated” at 100 million dollars? First of all, how would you know that? Second, the guy retired at 37 as a multi-millionaire, and lives in a 15 million dollar home in Manhattan. I’d give the guy kudos for being as successful as he’s been, and knowing when enough is enough.

    I agree Greenspan made some seriously bad calls, with the ARMs thing and the “irrational exuberance” statement being way up there. But supporting tax cuts was the correct thing to do, especially with a weakening economy. The fact that our Congress won’t stop spending so much money doesn’t change any of that.

    And the GOP has actually attempted to pass some small spending cuts (which weren’t really cuts, but were reductions in spending growth), and the Democrats in Congress wouldn’t have any of it. Even still, the budget deficit is falling fast and will probably be halved within the next year or two.

  32. hhh commented on Jun 25

    “the budget deficit will be halved within the next year or two ” ……….. Eye Doc tell us how that will happen

  33. uk commented on Jun 25

    KirkH …… I would be happy to pay 6.7% on $1M property rather than 10% on $500k …. it would probably mean that I have more assets and a higher income to pay off that mortgage ,….. what kind of thinking is that ?!?!?!?

  34. cbn commented on Jun 25

    EyeDoc … the point on Jim Rogers is that he isn’t always right …..even w/ $100M or $500m , although i never see him on Forbes 400 list …. the comparison to his partner is that he made $10B ( and donated $3B )and is always on the list

  35. zak commented on Jun 25

    ” budget deficit will be halved within the next year or two ” ……. we all wish

  36. Bob A commented on Jun 25

    ” budget deficit will be halved within the next year or two ”
    …I have some nice property in downtown Baghdad you might be interested in.

  37. PeterB commented on Jun 25

    uk writes “… it would probably mean that I have more assets and a higher income to pay off that mortgage”

    No, it wouldn’t. The example shows that you would be paying more for the same asset. And unless your wages have been increasing at the same rate as home prices, then you would be swimming against the current.

    Here’s a clue — wages have not even been keeping pace with core inflation.

  38. D. commented on Jun 25


    I think he meant 6.7% on 1M loan vs. 10% on 500K loan for the same property.

  39. Bob A commented on Jun 28

    the poop is in fact hitting the fan as we speak

    I was talking to a fellow Minyan this morning who “needed to chat.” When we got on the phone, he was borderline depressed and shared the following anecdote:

    Toddo, I don’t want to panic because I realize this is becoming consensus, but last night I spoke with a CEO of a tech. company who told me that in the last two weeks, two management level employees who make around $70-80k came to him asking for advances. They can’t afford their mortgages due to ARMS adjusting up. They bought the homes with nothing down. If this becomes a nationwide situation it could develop into a crisis. Again, I realize that I’m not alone in bringing this up but it just floored me as to the consequences that could be right in front of our eyes. I’m not sure if I want this posted, but I had to share it with someone
    p.s. as I mentioned on the blog the other day, they can’t ‘just refinance at the current low fixed rate’ as another commenter suggested, because they’re at 100% or more ltv, and they have no cash to pay down. Their option, walk away, rent a house or apartment for half what they’re paying in interest alone on their asset which is or will be worth less than they owe very soon.

  40. Bob A commented on Jun 28

    oh and I forgot to mention the prepayment penalty of 3-5% in many states including WA they causes a little bump in the road of that ‘simply refinance at the fixed rate’ argument, especially again when you’re at 100%LTV and have no cash… and you still have to come up with loan fees. Remember when values were appreciating most people who refinanced simply rolled these cost into their new loans by paying a slightly higher rate or increasing their loan amount.

    from another blog:
    Newt said…
    06/28/2006 5:41 PM
    Bad Mortgages and Bankruptcy
    I worked for a large wholesale mortgage lender until about 4 months ago. At the time I left, over 2/3 of our loan volume was done on Negative Amortization loans, and over half of those were done on investment properties. An evidence that lenders (despite what they might say) are worried about trouble ahead in real estate is that they’re constantly slapping prepayment penalties on their mortgages and making it harder and harder for someone to get a neg. am. or interest only loan on a non owner occupied property without being tied to it for at least 3 years. Just my 2 cents.

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