Blaming Greenspan

A few articles pulled from the weekend linkfest tell the story of how Housing ended up in its present slide and ongoing "challenging" circumstances.

What is frightfully revealing in the entire mess is the role former Fed Chair Alan Greenspan played in the current situation. We have long been a critic of Easy Al, due to his profligacy with money and his tendency to throw cash at any problem. Indeed, we have in the past viewed him as a more of a Cheerleader than a central banker. We even spent time reviewing some of the myths of the Greenspan era. We have long suspected that his halo would tarnish as his role in the current Housing and other messes became more clearly understood by the public.

But even some of his fiercest critics had to be surprised by the most recent revelation:

"Edward Gramlich, who was Fed governor from 1997 to
2005, said he proposed to Mr. Greenspan in or around 2000, when
predatory lending was a growing concern, that the Fed use its
discretionary authority to send examiners into the offices of
consumer-finance lenders that were units of Fed-regulated bank holding
companies.

"I would have liked the Fed to be a leader" in
cracking down on predatory lending, Mr. Gramlich, now a scholar at the
Urban Institute, said in an interview this past week. Knowing it would
be controversial with Mr. Greenspan, whose deregulatory philosophy is
well known, Mr. Gramlich broached it to him personally rather than take
it to the full board.

"He was opposed to it, so I didn’t really pursue it," says Mr. Gramlich, a Democrat who was one of seven Fed governors."

There is a big difference between merely being wrong — as everone in the forecasting business frequently is — and corruptly turning a blind eye to inscrupulous if not illegal behavior. It appears that Mr. G. is guilty of both types of malfeasance.

More on this as it develops . . .

>

   

Sources:
Did Greenspan Add to Subprime Woes?
Gramlich Says Ex-Colleague Blocked Crackdown
On Predatory Lenders Despite Growing Concerns

GREG IP
WSJ, June 9, 2007; Page B1
http://online.wsj.com/article/SB118134111823129555.html

Housing Inventory Build Worsens    http://bigpicture.typepad.com/comments/2007/06/housing_invento.html

More Mortgage-Industry Firms Subpoenaed as Probe Expands
CHAD BRAY
WSJ, June 9, 2007; Page A5
http://online.wsj.com/article/SB118133643715729450.html

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What's been said:

Discussions found on the web:
  1. will rahal commented on Jun 11

    Barry,
    I thought you might be interested in work I did ,showing how consumption of indispensable items
    has left less income for discretionary spending , which in turn affects production and consequently the economy.

  2. John Thompson commented on Jun 11

    Pesky regulations. If you enforce disclosure and fairness, can’t rip anyone off that way. That would be antithetical to common business practice?

  3. Chris commented on Jun 11

    Seriously how bad was this guy. My favorite has to be telling people to get into ARM’s at 50 year lows in rates. You would almost believe he was trying to screw the public as much as possible.

  4. KP commented on Jun 11

    The Fed Chair is appointed and effectively answers to Bankers, not the general public.

    It would be naive to believe that he will be altruistic under the current system.

  5. js commented on Jun 11

    I am not a Greenspan fan (understatement). But this even surprised me.

    KP, could you elaborate on your statement that the Fed chair answers to Bankers. I do agree with your overall statement.

  6. pacific_waters commented on Jun 11

    Gramlich gets a pass as does the rest of teh board? Oh, please, as bad as the Greenspan may have been there are 7 members of the board. They share responsibility for making monetary policy decisions. It was Gramlich’s responsibility to take his doubts to the board. Anything less was a dereliction of duty.

  7. Ralph commented on Jun 11

    I don’t think we can forget that he was not alone. The entire administration for the last 7 years has had atrociously bad economic policies.

  8. michael schumacher commented on Jun 11

    What is Greenspan’s motivation for getting people into ARMS at 50 year lows???

    I find it laughable that people think that politics are not prevalent at the BOD level in ANY entity, gov. or corporate.

    May be that Grammley is just distancing himself before it becomes an issue.

    Love how our country works…..if it works out then take all the credit. Problems?….plausible deniability….it’s worked for Bush for almost 7 years now..

    Ciao
    MS

  9. KP commented on Jun 11

    Fed Chairs and Board members get to where they are because of their financial industry ties. Just like everything else, it’s a political appointment. It is no doubt one of the most thankless jobs in the world. Neither He or the rest of the board of governers have any control over anything. They just get put on the spot when the shit hits the fan. The U.S. Treasury(Paulson) and China now run the show now via the treasury’s printing press and the China’s purchasing power of US debt. The Fed for the most part is along for the ride just like the rest of us.

    Could the FR try to stop the debt madness? Sure Bernake is an economist, and probably a smart guy. He can see what’s up just as we can, he could try and make a stink, maybe he has(internally)….but he joined the party a little late to really put the brakes on this mess anyhow, so why rock the boat? All he can do is gently go on record that inflation is here and he wishes that it will go away without waving his hands to wildly. I think he has been doing that.

  10. jag commented on Jun 11

    So someone claims they saw a problem, raised the issue and then backed off…..

    As someone above notes, this isn’t (if its true) particularly courageous behavior.

    I’m no defender of Greenspan’s last choices, however, I find it really hard to believe whatever comments he made had much influence on many individuals taking out ARM mortgages at any point. I’d bet a urvey of ARM consumers would indicate the vast majority of them couldn’t tell you who Greenspan was nor what the FED does.

    Greenspan made mistakes. But one of them wasn’t convincing anyone to do an ARM vs a conventional fixed rate loan (at record low rates).

  11. KP commented on Jun 11

    I wouldn’t even be surprised if Greenie was ORDERED to lower rates after 9/11 so the gubment could cheaply finance its ramping up of the war machine…that Clinton slowly choked down to size during his time in office.

  12. michael schumacher commented on Jun 11

    I also fail to see how this is Greenspan’s fault. I ask again what is his motivation for getting people in to ARMS.

    The problem here is simple and emotional.
    If home ownership is dangled in front of you and you have to get in at any cost (that is completely the signee’s problem) then you begin to see how it is abused and people sign up to get that loan regardless of whatever the details of it are.

    They are simply making an emotional decision that is not goverened by rationale thought.

    Sign here and I get a house…..don’t sign and get no house. That is as simple as it can get.

    Ciao
    MS

  13. KP commented on Jun 11

    Greenie’s motivation for ARM’s COULD be that it would encourage people to SPEND! Not just spend…but lock themselves into a loan which is advantageous…in a rising rate environment( I would call historically low rates a bottom and therefore a rising rate environment) this is obviously good for banks. Noone really clearly understood what they were signing up for(though they should have tried!). The banks sure did though. It was also a way to distract the people from what was really going on…the mashing of the government spending gas peddle.

  14. KP commented on Jun 11

    BR…I could only venture a guess that it came from the White House….Probably Wolfowitz. Just a guess.

  15. shawn commented on Jun 11

    I equate Greenspan public embracement of ARM and sub-prime as Pumping Liquidity. A lot of people don’t really get what it means by Pumping. Here’s my simple 2-cent explanation.

    1) There is always demand for credit out there, and it is up to gatekeepers like Greenspan and its bankers to decide if they want to loan the suckers who are not afraid of speculation (since they probably got nothing to lose to begin with).

    2) By lowering the loan standards and requirements, FED and its bankers essentially “give out” money to the masses who could not have gotten it by historical lending standard.

    3) This creates tremondous amount of money and aggregate demand for all goods — housing, cars, and all other industries related to these 2 big items.

    Greenspan and Bernanke would go to Hell eventually!

    They act publicly like they don’t know why the inflation is stubbornly high, but they pumped the money at back door madly. Liars.

  16. Bluzer commented on Jun 11

    Greenspan is, first and foremost, a Republican. And so reflexively believes that regulation is a cure that is worse than the disease and de-regulation is the elixir that will bring back the dead. He was, when seen in this context, playing true to type.

    As to his being corrupt – I strongly believe he was – at least inadvertently. Serving the best interests of a master other than “we the people”. And I can say this in this comment section. But Barry, by making this accusation without any evidence – anecdotal or otherwise – you tend to diminish your blog at the very least, and more seriously, the entire case of the Greenspan realists.

  17. s0mebody commented on Jun 11

    Everybody get your pitchforks, round up the mob.

  18. GerryL commented on Jun 11

    I think the problem with Greenspan was that he was more a politician than a banker. Just like most politicians the most important thing to him was keeping his job and maintaining power. He was politically correct and didnt want to alienate Congress or the White House. Compare that to Paul Volcker who was willing to make the difficult choices.

  19. Winston Munn commented on Jun 11

    Isn’t it quaint when we name the bank the Federal Reserve when in acutality it is neither a federal entity nor does it hold any reserves (at least not the sort that back the dollar.)

  20. js commented on Jun 11

    Bluzer,
    I am sympathetic to the “regulation is a cure that is worse than the disease” comment. However, the FED by definition is a gatekeeper to restrict lending and money creation. If Greenie does not believe in regulation then he does not believe in the existence of the FED or anything it does. Why become the Chief then? He implicitly agreed to the institution and its need by becoming its head. It seems disturbing that he would let excesses built up when there is a need to curb them and provide liquidity (read lending of last resort) when the free market is wringing the excesses.

  21. js commented on Jun 11

    Bluzer,
    I am sympathetic to the “regulation is a cure that is worse than the disease” comment. However, the FED by definition is a gatekeeper to restrict lending and money creation. If Greenie does not believe in regulation then he does not believe in the existence of the FED or anything it does. Why become the Chief then? He implicitly agreed to the institution and its need by becoming its head. It seems disturbing that he would let excesses built up when there is a need to curb them and provide liquidity (read lending of last resort) when the free market is wringing the excesses.

  22. js commented on Jun 11

    Oops. sorry for the double post.

    as I was saying when the free market is wringing the excess debt out of the system, Greenie steps in to add to the lending by cutting rates. Can’t have it both ways. either you let the market work both ends of the deal or you don’t.

  23. wunsacon commented on Jun 11

    So, Gramlich pulled a Tenet? Sure, the guy above him didn’t give a shit. But, you make your case anyway. Nag everyone who might help before you give up. After you begin annoying people but before you risk souring relationships (and losing your job), back down. But, at least give it a shot.

    Gee, it’s not like the prosperity of your fellow citizens depend on it. ;-(

    And, gee, another Democrat who gave in. The evidence is mounting (for me anyway) that the desire to fit in is a more powerful force than I recognized.

  24. S commented on Jun 11

    One of the biggest myths in the blogsphere is that Greenspan urged consumers to adopt adjustable rate mortgages when interest rates were at historic lows.

    In a speech before the National Credit Union trade group in February 2004, he remarked that Americans pay a high cost for the certainty of fixed mortgage payments and having the opportunity to “put” fixed rate mortages back to lenders when interest rates fall. To support his claim, he referenced a study conducted by the FED which showed Americans could have saved many tens of thousands of dollars on their mortgages had they used adjustable rate mortgages to finance mortgages rather than fixed rate mortgages during the declining interest rate environment we had experienced. He went on to say that would not have been the case, had we been in a period of sharply rising interest rates.

    He pointed out that if consumers are willing to manage interest rate risk, they could have saved money. I’m a bit surprised the usually highly innovative financial services industry didn’t jump all over this part of his statement and create a new market for interest rate swaps allowing individuals to hedge interest rate risk associated with adjustable rate mortgages.

    Here’s a link to the speech. The relevant comments are in the paragraph just prior to the concluding paragraph:

    http://tinyurl.com/rdaub

  25. m3 commented on Jun 11

    hey, let’s not let the banks off this either. it wasn’t just the fed.

    the fed didn’t design and push option ARMs, teasear rates, interest only ARMs, negative amortization loans, etc.

    the fed didn’t package these sub-prime mortgages as AAA rated CDOs, and sell then CDS on this toxic waste to unsuspecting investors.

    if the commercial banks had kept any sort of professionalism or prudence, this wouldn’t have happened.

    the fed was complicit, but let’s be honest about who else is to blame…

  26. rebound commented on Jun 11

    Though not a fan of Greenspan, I have defended him … and the new guy … in previous posts from what I thought at times to be unfair criticism or inappropriate comments.

    However, failure to intervene in the sub-prime/predatory lending mess, when having been warned ahead of time by a peer, is almost unforgivable. To help redeem himself, he should should acknowledge his error publicly and work to help educate the public and the bankers on how not to let this ever happen again. I would argue that the same thing needs to take place with regulation of the Credit Card industry. If the Fed can raise and lower rates, why can’t they regulate a cap on credit card rates? (The max rate for a loan can be X%, regardless of credit rating. If the loan is still too risky to allow for sufficient returns, the loan is not to me made, as the person is simply not qualified to take on such a liability.)

    With so much power in so few hands, I don’t see how it is possible to get away from having some regulation.

  27. Bluzer commented on Jun 11

    js –

    The regulation I was referring to was the oversight recommended by Gramlich. Greenspan, almost religiously, was opposed to that.

    As to his acceptance of the Fed – that’s an interesting point. Early in his career, possibly in his doctorate dissertation, he argued against the need for the Fed. Asserting that monetary policy is best dictated by the executive branch. So is it surprising that, when given the reins he would do exactly what he once advocated? Make the Fed an extension of the administration? And be succeeded by ‘helicopter Ben’ – who has also publicly advocated the remediation of the excesses of irresponsibility – by more of the same.

    Interesting Times!

  28. groucho commented on Jun 11

    Let’s stop the BS here. Greenspan gave the policy makers what they wanted. CEA & FED gov’s, past and present wanted to make sure that “deflation doesn’t happen here”. Whether Greenspan agreed or not to the liquidity flooding and fiscal pumping is unkown. Bottom line : he went with the prescribed program and he should be held accountable for the fallout.

  29. Joe Klein’s conscience commented on Jun 11

    Bluzer,
    As regards Greenspan and his dislike of regulation, as my macro-econ teacher told me, why anyone would put a former disciple(and supposedly part of her inner circle) of Ayn Rand in such a position is beyond me.

  30. Estragon commented on Jun 11

    BR – “corruptly turning a blind eye to inscrupulous if not illegal behavior.”

    Your use of the term “corruptly” suggests Greenspan acted in the way he did for personal consideration. Can you back up that assertion?

    Also, the distinction between “inscrupulous” (sic) and “illegal” is key. If lending methods are illegal, the fed has the mandate to implement and enforce regulations giving effect to relevant laws. If the methods are legal, but unsavoury, Congress has the responsibility to address the problem. Legislation by regulation relieves elected officials of their responsibility and deflects accountability.

    I’m no Greenspan apologist, but…

  31. Bluzer commented on Jun 11

    “why anyone would put a former disciple(and supposedly part of her inner circle) of Ayn Rand in such a position is beyond me.”

    Conscience –

    Good point. Greenspan was indeed a self-appointed member of Rand’s inner circle. She however considered him a lightweight – and is known to have mocked him on more than one occasion.

    One may disagree with Rand but one cannot question her integrity. The same, alas, cannot be said for our former maestro of the mints.

  32. KirkH commented on Jun 11

    Housing was the helicopter and the only people selling gas had criminal records.

  33. Joe Klein’s conscience commented on Jun 11

    Bluzer,
    As far as Rand mocking The Maestro, I have heard things that fit your description(like him being a bottom in S/M parlance). I bet he was picked entirely because he was a lightweight. Someone that could be convinced to do certain things(ramp up the printing presses), without their conscience getting in the way. After all, he is set. What does he care what happens to the little guy? Life is good for him. He’s still the toast of Wall Street(they do react to things he says).

  34. aglomada commented on Jun 11

    I’m tired of people like Edward Gramlich, or Dick Clarke for that matter, suddenly coming out of the woodwork and proclaiming that they knew it all along, if only the powers that were listened to them.

    If they knew their message was so important, why didn’t we hear from them at the time?

  35. aglomada commented on Jun 11

    I’m tired of people like Edward Gramlich, or Dick Clarke for that matter, suddenly coming out of the woodwork and proclaiming that they knew it all along, if only the powers that were listened to them.

    If they knew their message was so important, why didn’t we hear from them at the time?

  36. DD commented on Jun 11

    Which one of you wankers is in favor of more regulation?? in an shape or form…the one right decision he made was to stay out of it…thought bringing rates to 1% definitely wasn’t…or was it…depends if you want money to be inflated or not…I guess we saw what his agenda was inflate the currency base and move the money from the people working trying to pay the mortgage to the bankers…brilliant…I only wish I was so cunning…

  37. Bob Brooklyn commented on Jun 11

    Maybe there is an invisible hand after all…looks like the Shysters of the Universe capitalizing on the change in eminent domain law (circa 2005) are probably getting their propert/ies devalued.

  38. wunsacon commented on Jun 11

    Richard Clarke made a stink under the covers at the time. Can’t expect the guy to come out with a book deal before 911 or a month afterwards. I consider him and Tenet to be in different boats.

  39. john wellman commented on Jun 11

    seems like many smart people on this post. I want to thank you for thinking for the rest of the nation and the little people like myself. I’m just an enlisted squid on a submarine, who sold a house in charleston s.c. and then bought a house in cody, w.y. I used a zero down, 30 year normal amortization mortgage. I had the option to take better (less costly mortgage payments) for a while using the alternative credit products. Using a bit of risk assessment, I determined to use the normal loan. I know who Greenspan is, I know who many people are in the financial world. They did not influence my financing appetite. I made my own choice, using financial discipline and delayed gratification to see beyond the monthly payment. Greenspan seems like an ornery old man and I have heard he is a poor golfer and bad tipper at beltway golf courses. Whatever our collective biases, they have little to do with ol’ Al and his choices, the same way his choices had very little influence on my financial choices. BTW, bonds rising as of late with how many months of fed rate holding? Seems that the influence of this revieled man and his office’s potency is waning as the global financial markets get bigger and bigger. Markets have more influence than the fed figurehead. I am inviting all US taxpayers to come join me on my upcoming deployment where we can separate ourselves from the news cycle noise and have wonderful intellectual discourse on economics and finance while hundreds of feet underwater. Submarine sabbatical might help y’all out. Cheers!

  40. DavidB commented on Jun 12

    But, you make your case anyway. Nag everyone who might help before you give up. After you begin annoying people but before you risk souring relationships (and losing your job), back down.

    Why did he tell it to the media? It’s not like he didn’t have the opportunity to go out and make speeches

    They are supposed to be public servants and yet they act like a club of the worst insider traders who will only admit to the problem when they are confronted with it. Then they go about after the fact and make speeches saying they were warning the members in an obvious ploy to cover their own tracks.

    For the amount they get paid and the amount of wealth these guys usually have they have no excuse since their financial futures are not in jeopardy

  41. Matthew Kennel commented on Jun 14

    Actually the people’s financial futures certainly are in jeopardy if they blow the whistle.

    All the reward is, of course, in post-government service. They aren’t making much money (relatively) as a GS-XX or whatever the Fed equivalent is. Much of the money is in their later private sector job where they tap the connections they made in the Fed.

    In this context, an unknown publicly complaining about Greenspan’s lack of regulatory enthusiasm would be zyklon for their future career.

    What banker would hire a goody-two shoes who’d snitch on them about their most profitable products?

    Actual Republicanism in action: when it comes to regulation to protect joe six pack they hector and proclaim in high bombast, quoting chapter and verse from Ayn Rand. But when any major financial institution (good republicans all) gets an owie—no problem, free money from the gubermint!!!

    GMAFB.

    Too bad for New Orleans they didn’t have big hedge funds.

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