NYT: Blaming the Fed for the Sub-Prime Mortgage Crisis


“Hindsight is always 20-20, but it’s clear the Fed should have acted earlier. Financial innovation is great, but you have to have some basic rules. One of the most basic rules is that a borrower should have the ability to repay.”

–Sheila C. Bair,chairman of the Federal Deposit Insurance Corporation


Back in August, I wrote a piece titled The Ongoing Impact of the Housing Sector.  In that, I discussed all the many people responsible for the sub-prime housing crisis (which has subsequently led to the present credit crunch).    

I singled out the Fed for two reasons: 1) taking rates down to ridiculous levels and leaving them there for too long,  and 2) their failure to adequately perform their banking regulatory responsibilities when it came to the origination of mortgages.

Today’s page one NYT article covers the latter in grisly detail Fed and Regulators Shrugged as Subprime Crisis Spread. They single out Greenspan for his part in allowing unregulated problems to fester.

You can read the full article there, but here I wanted to emphasize the graphic:

click for larger version2007subprime

courtesy of NYT

Download ginormous version: 2007subprime.jpg


As we have seen in oh so many different contexts, the blind adherence to dogma and ideology, from religious zealots to acolytes of Ayn Rand, seems to only lead to a broad range of problems, ranging from errors in judgment to  unnecessary pain. Ultimately, most political and economic extremists collapse under the weight of their own slavish devotion to a universal idea that is inapplicable to a specific situation. Some people call this consistency, but the word "stupidity" means the same thing, and can be typed with less letters.

I’ll take a pragmatic technocrats over the syncophants, idiots and idealogues any day of the week . . .   


Fed and Regulators Shrugged as Subprime Crisis Spread
NYT,December 18, 2007

The Ongoing Impact of the Housing Sector
Barry Ritholtz 
Investors Insight, August 24, 2007   

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What's been said:

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  1. fatbear commented on Dec 18

    Ah, but they forgot this:

    Greenspan says ARMs might be better deal
    “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage,” Greenspan said.

    2/22/04 (or thereabouts)

  2. fatbear commented on Dec 18

    And let’s not forget that this one time the Times headline writer had a sense of humor – I’m sure it started as Alan Shrugged but got shot down

    How many Big Picturers out there think that big Al knew what he was doing, and thought that in the mortgage jungle the plebs were there for the rightful fleecing?

  3. fatbear commented on Dec 18

    Hey, Barry – it’s fun this early – sorta my own blog – promise, this is my last comment for now – gotta get to the Apple store in Soho for my class

  4. Barry Ritholtz commented on Dec 18

    Hey Fatbear,

    I never mind multiple comments — as long as they contribute something to the dialogue.

    Your fine . . .

  5. lurker commented on Dec 18

    Barry-you neglect the main reason Alan Shrugged. Pleasing lobbyists and political masters has corrupted the Fed absolutely. Volcker was truly independent and thus feared and disliked and EFFECTIVE. Easy Al was loved and revered (owned by the elite)and we will be paying the price for years.

  6. stickler for spelling commented on Dec 18

    top blogger spelling errors:

    you’re = you are!

    there – as in “over there”
    their – as in “their fault” or “their ipod”, ie. belonging to someone.
    they’re = they are!

    “you will lose the game if you play too loose”

    “there is a theory if your subprime lending is too loose, you’re likely to lose money as their credit deteriorates and they’re not going to pay you back!”

    Class over!

  7. Paul Jones commented on Dec 18

    ECB just dropped a half-trillion into the system; I’m not sure what to think of that.

  8. rob commented on Dec 18

    Time for Alan to walk quietly into the sunset, the guy is like an ingrown toenail that just won’t go away.

  9. cinefoz commented on Dec 18

    stickler for spelling said …

    “there is a theory if your subprime lending is too loose, you’re likely to lose money as their credit deteriorates and they’re not going to pay you back!”

    reply: Your grammar may be correct, but it is boring.

    “Deadbeats and very poor people won’t pay you back if you’re dumb enough to loan them money” makes the point more clearly and is more fact than theory.

    “Stupid is as stupid does” is also on point, but lacks context.

    “Unpaid money is get what you will. Unwise is credit easy” is how Yoda might say it.

    Got it?

  10. justino commented on Dec 18

    I think you guys are just to hard on Alan. Remember the “real” problem of deflation at the time, and the horrible memory of what happen to Japan. Also remember; “hindsight is 20-20.” The rest goes down as: “I don’t know, so I’ll do nothing, and oh shit!”

  11. strasser commented on Dec 18

    Barry, interesting that you mention Ayn Rand. I wrote this the other day which includes a piece from one of her books:

    Comrade Citizen, for the greater good

    With the barrage of headlines over the past several days concerning freezing mortgage rates, bailing out homeowners, foreclosure moratoriums… and having written on Wednesday of Hillary Clinton’s demands, yesterday’s proposals by Treasury Secretary Paulson and President Bush to offer homeowners assistance, today’s Bloomberg headline comes as no surprise as Senator Dodd has sent a letter to Fed chairman Ben Bernanke indicating he must “forcefully protect homeowners”.

    And with all of this, I cannot help but think of “We the Living” by Ayn Rand. In this novel she speaks of the Upravdom, a citizen who is elected to represent the other citizens… my idea is that it would be kind of like a union boss. So there is this scene where the Upravdom calls the tenants to attend this urgent meeting. He says: “No exceptions, citizens. Social duty comes above all. Every tenant gotta attend the meeting.”

    So the tenants bring their own chairs and chew on their sunflower seeds in this one large room which was offered for use by another citizen due to “social duty”.

    “Seeing as how I’m the Upravdom, ” said the Upravdom, “I declare this meeting of the tenants of the house Number — on Sergievskaia Street open. On the order of the day is the question as regards the chimneys. Now, comrade citizens, seeing as how we are all responsible citizens and conscious of the proper class consciousness, we gotta understand that this ain’t the old days when we had landlords and didn’t care what happened to the house we live in. Now this is different comrades. Owing to the new regime and the dictatorship of the proletariat, and seeing as how the chimneys are clogged, we gotta do something about it, seeing as how we’re the owners of the house we lived in. Now if the chimneys are clogged, we’ll have the house full of smoke. . .

    “… and the special assessment will be divided in proportions to the. . . Is that you Comrade Kira Argounova, trying to sneak out? Well, you better don’t. You know what we think of people that sabotage their social duties. . . And the special assessment will be divided in proportion to the social standing of the tenants…”.

    Makes me wonder when I read those words. And yesterday Greenspan said to ‘just give the money to the homeowners’. Another door opened!

  12. cinefoz commented on Dec 18

    One big part of the problem is the idiotic part of supply side theory that claims you can borrow your way to prosperity. The qualifier is that you don’t need to pay it back and that you can borrow for Consumption, rather than for Investment. The justification is that lower taxes and cheap illegal Mexican labor will pay for it all.

    Makes perfect sense, right? The Mafia should have it this good.

  13. fatbear commented on Dec 18

    Word for the day (from an arty NPR show over the weekend):

    Poor people who hit the lottery don’t become rich people; they become poor people with money.

    It works the other way too….

  14. Roger Bigod commented on Dec 18

    There used to be a radiologist at Yale named Greenspan, and I believe I’ve heard that Alan is his brother. The radiologist was highly respected — hard-working, interested in the total clinical story of his patients, a superb teacher. I’ve wondered over the years if their mother ever stopped saying “my son the academic doctor” and switched to “my son the banker chairman”. The cycle won’t be complete until these values return to their proper scale and perspective. (Returning the money to its rightful owners is a little too much to hope for.)

    This has been your geezer curmudgeon message of the day.

  15. D. commented on Dec 18

    For the last 5 years, I have been ridiculed for talking about a bubble in real estate.

    I believe the Fed is at the top of the list but I find it disgusting that the media that denied this bubble for so long now has the nerve to single out a culprit.

    Maybe they should write an article about the role they played in building up Greenspan’s public image, as in turning him into the Maestro.

    They could have nipped this bubble in the bud by simply doing some real homework. They did not even need a huge budget to get it. Heck, the data is everywhere for everyone to see!


  16. Ross commented on Dec 18

    Alisa Rosenbaum aka Ayn Rand never understood Slavic people. She also did not understand Western mathmatics and our Germanic social system. Like her counterpart, Lev Davidovich Bronstein, she was only grist in the mill of history. That Greenspan was her syncophant is no mystery.

  17. mreynolds commented on Dec 18

    Thanks for the wonderful post against ideology. I have been blogging on the topic of ideological decision making in another more political blog. This mess is what you get when your world view is black and white. Subtlety is lost, nuance is ignored all for a strict adherence to dogma. Bush was highly praised for being a guy who sticks to his guns, he is the one whose ideology was followed to this ugly end we are seeing now. Remember this when you vote in November.

  18. J.S. commented on Dec 18

    What D said.

    I read (pronounced red) many articles on the web about the looming crisis during its multi-year ramp-up. A significant subset expressed concern about the growing tonnage of the derivative bomb that accompanied the bubble. I don’t remember whether any were written by ‘establishment’ reporters.

    I wonder… did Mr. Kudlow warn us about what might happen?

  19. BigMary commented on Dec 18

    right on stickler!

  20. zell commented on Dec 18

    D. is right. Greenspan, the rest of the Fed and regulatory agencies are responsible, along with the financiers of this bubble that are guilty of avarice and forethought.

    There is no escape now because whatever remedies that politicians work out, it will not stop deleveraging.

  21. Advsy commented on Dec 18

    I get this.
    As to the solution. All kinds of folks keep saying that the Fed needs to lower rates. That is the only thing that can save us. Yet, that would not jive with the above? Or does it?

  22. cinefoz commented on Dec 18

    JS Said …

    I wonder… did Mr. Kudlow warn us about what might happen?

    reply: Yes, but he calls it Goldilocks and denies the existence or possibility of a market that might go down … unless Democrats are involved.

    He recently shut down comments to his blog. I guess he was tired of being wrong so often and having others, such as me, point it out so frequently. Oh, well. At least I can write here. But, since, this is a much higher class joint, I can’t be nearly as big a smartass here as I was there.

  23. Peter Davis commented on Dec 18

    I wonder how this will go down on the Easy Al Revisionist History Book Tour?

  24. curmudgeonly troll commented on Dec 18

    Barry –

    the only problem with your theory is that Greenspan was the ultimate pragmatic technocrat. They make mistakes too.

    God save us from more Fed ‘accountability’ a/k/a political intervention.

    And a gold or commodity standard or monetary rule… remember Goodhart’s law. Even Volcker couldn’t stick with it when it meant double digit interest rates and unemployment as far as the eye could see.


    BR: Pragmatic technocrat? He’s more of a drunken sailor on shore leave . . .

  25. scorpio commented on Dec 18

    Alan Shrugged. that’s a good one.

  26. D. commented on Dec 18

    But with globalization, the world has gotten harder to understand for most people. We’ve created a world where 30 year olds still don’t know enough to make quite a few life decisions!

    My sense is that most in the Western world have got the feeling that we are about to go through a redistribution of wealth on a global scale. This is scary stuff and a perfect breeding ground for ideologies.

    I don’t think cleaning up this mess will solve anything. I think an ever increasing number of ideologies will creep up on us as more and more people feel the carpet is being pulled from under their feet.

    Most of us are not made for this globalization. Actually, I’m not sure humans are made for large group collaboration. I think our governments made huge mistakes and went too far too fast and we’re about to witness a backlash.

  27. Donny commented on Dec 18

    Hey, can we lobby the Queen to take away his Knighthood?

  28. Unsympathetic commented on Dec 18

    Yes, there was a problem of deflation when Greenie started to lower the rate.. and guess what, the same root cause was papered over but has now come back stronger.

    However, if he’d let the various bubbles pop and forced the economy to take its medicine each time, we would not have the problem we have today.

    This is rather akin to the San Diego policy of immediately snuffing all fires for 2 decades, then being shocked when they get out-of-control fires that feed off the underbrush they haven’t cleared since we were fighting in Vietnam.

    Debt has been deflating slowly since Russia defaulted on its debt in the 90’s, but instead of sharply dealing with it and forcing strong CLTV standards (among other things), Greenspan and the Fed let stupidity run wild to paper over the crisis.

    Now, the crisis is too big – the Fed has run into Japan’s liquidity trap, they can’t force people to borrow even with money nearly free.

    I don’t expect Bernanke and Paulson to get on TV tomorrow and start screaming ” Holy Jebus! We’re sunk! Run for the hills! ” but this is the unstoppable result of what Greenspan did.

    Barry, please slide in a promo of Fleckenstein’s book.. I can’t wait to read it.

  29. zell commented on Dec 18

    As mentioned earlier, the ECB dumped .5 T. into the hopper. We’ve gone past the point of ” no return.” Let’s forget about Greenspan, the Bubble Maestro, for now. He, and the pro growth ideologues, however you define growth at any cost, have taken us – and I do mean “us’, to this point. The ocean currents have shifted, thanks to global economic giga- warming.
    Today there was also some print on only a portion of the true debt overhang in the U.S…coming to your theatres soon. Inflate or choke. Choose your poison.
    Beware the undertow, which has been in place since “Recognition Day” in August.

  30. Stu commented on Dec 18

    I thought, at a minimum, any Fed chairman or Fed member would have an understanding of the history of financial bubbles and how to avoid them. Mr. Greenspan has the dubious distinction of presiding over the stock market bubble of 2000 and the housing bubble of 2005-2007. Good work Alan.

  31. Opi Juan Karaoke commented on Dec 18

    What is wrong with deflation? Geez, prices for ‘stuff’ go down? I can safely put my money in a bank at 1% or under my pillow without the threat of it depreciating in value?
    Deflation is simply a natural revision to normality. Inflation causes bad judgement and mal investment.

  32. Jon W commented on Dec 18

    “Syncophant”? Had to look that one up in the urban dictionary dot com since it is not in the real one.
    “A misspelling of the word “sycophant” used by ignorant ghetto people and neocon morons.” lol.

  33. Francois Theberge commented on Dec 18

    After reading the NYT article, I was left with the clear impression that ideology trumped common sense big time.

    Couple of random thoughts:

    1) The concept of having “user fees” as integral part of a federal agency budget is beyond ludicrous, (a.k.a. built-in conflicts of interest) yet politicians happily endorsed the idea so they can repeatedly claim “no new taxes”.

    2) The market can policed itself.
    Yeah right! Policing means enforcement of basic rules applicable to everyone by an independent party.

    Where is the “independent party” in the Market? The Market itself? Hmmm! Judge and jury huh? Sure thing!
    Move over and drop dead already false disciples of Ayn Rand!

    3) Biology 101 teaching point with general implication to any complex organism:

    Growth without control (regulation for the nekulturny) is called CANCER! It starts locally with one cell, multiply, mutates, escapes ordinary controls, then metastasized to the whole organism. (“The housing market situation is self-contained” bwahahaha!) This is what we got in the housing market, no?

    Magister Dixit!

  34. Opi Juan Karaoke commented on Dec 18

    “Syncophant” is simply a synthetic sycophant. A wannabe. Yous gotta probem wit dat?

  35. JT commented on Dec 18

    Nobody forced the consumer to sign the mortgage papers. This is my frustration with the system. If all these people had ARMs and the market moved up the gov’t would not do anything. It begins and ends with the consumer, in this case, the borrower.
    If we (read gov’t) will not let people fail then I have to rebuild my whole value system and model on how I do things. I will immediately go out and buy a McMansion, 1 El Diablo, Pioneer HDTVs for every room including the bathrooms and then call my representative in Congress and ask for my personal bailout.
    I am sorry that people failed but this is life. You take a risk and sometimes you are rewarded and sometimes your ass is handed to you on a platter (ask me about selling crude in the mid-80s on the way up to $99.00.

  36. donna commented on Dec 18

    Randian ideology only makes sense until you grow up.

    Unfortunately some people never grow up, and other people put them in charge of the Fed.

    The next few years will show what really happens when you give all the money to the rich folks who think they are the only ones who deserve it.

  37. NC Jim commented on Dec 18

    I think one makes a big mistake by concluding stupid when corrupt can equally explain the data. IMO, Greenspan was never very independent of Wall Street and the GOP – more like the Japanese model than the UK or EU.

    Greenspan mumbled, Bush lied, Chaney schemed, and Wall Street cheated and ,together, the greatest looting of all time took place. These are VERY competent people if you correctly define the objectives.

  38. Dave Livingston commented on Dec 18

    Sorry but this is an area where I need to caveat Barry’s and the readers normal assessments a bit. Remember the conundrum ? Well with excess global liquidities the Fed and other central banks had limited abilities to raise long-term rates. Nobody’s paying attention to that point but it is profound. Nor is anybody giving credence to another couple of critical points. The Fed would have had to start raising rates in ’03 – think about what else was going on then and ask yourself if that was the time and place. Another point that Uncle Alan has made is that the Fed shouldn’t be bursting bubbles as many have argued. Aside from whether they could or not the risk of inducing a major downturn to deflation, that’s Depression, are too high.

    The real problem here is that leveraged structured debt created perverse incentives to maximize the deal flow at the expense of rapidly declining asset quality. Instead of the supposed traditional model of making money by investing in sound assets. This was a regulatory problem and where the Fed did fail was in lacking the foresight and imagination to institute new regulatory regimes to a) prevent predatory lending and b)invent new mechanisms to reduce the proportion of bad assets that were re-leveraged. Any suggestions because it still remains to be done.

    The final barrier was that these should have been put in in ’04 when the possible impacts were first being discussed among central banks. Would there have been any support by anybody in that timeframe ?

    Fed policy is actually pretty logical and reasonable within the limits of understanding and tools – not always right but a lot better than it has been among Central bankers. Try this on for size:
    Credit Mess & the Fed: (anti-spam prevented URL post but if you’re interested try the blog and look for the Fed strategic outlook posting)

    Credit Mess and the Fed: Understanding the Strategic Posture

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