Open Thread: Greenspan’s Follies

Our earlier look at Age of Turbulence as well as the criticism by Gramlich and Poole created a lot of very interesting comments. You folks (obviously) have some things to say about this.

Here’s our Sunday night challenge: How much blame does Alan Greenspan deserve for all of the current mess we are in? What percentage of responsibility lay at his feet?

I weighed in on this when Greenspan retired 30 months ago (Myths of the Greenspan Era) — but since then, a lot more evidence has come to the fore.

I want details: Specifically, what bad policy decisions, miscalculations, ideological foibles, and just outright poor judgment did Greenspan show over the course of 18 and a half years as Fed chair?

~~~

What Say Ye?

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  1. OnSideRestorationSucks commented on Jul 27

    Greenspan made money cheap. Investors thought they could do better. New instuments, new ways of laying fees to up the return and pad the exercise. Should have he know how innovative WS could have become. I think not.

    Lax lending led us down this road. Period. Greed led us down this road. Period.

  2. Ames Tiedeman commented on Jul 27

    History is not likely to judge Mr. Greenspan very well. He got lucky in the 1990’s with a productivity surge, but it ended badly with the dot com collapse. He lowered rates to save the economy in the 2000’s and then got side swiped by the mortgage collapse once he left office. The truth is, however, if Congress had passed a law mandating 10% down on all mortgages and outlawing teaser rates, would we be in this mess? If the crowd that qualified at 2.5% had to qualify at 6% or 7% would this have happened? I blame Congress first.

  3. Bruce commented on Jul 27

    Barry,

    Greenspan must be accountable for much of the housing crisis…certainly not all, and my point is what I have written before and many others here feel the same.

    I will make my point by parts of other posts I have written here over the last several months.

    Greenspan saw the tech bubble, coined the term “irrational exuberance”, and told us, if we would listen that the tech mania was going to end on his watch. My personal experience was to put my entire retirement portfolio into just a few tech names in October of 1998 and when Greenspan started making noises about raising rates, paid attention. I sold all my shares in April of 2000, and all my investment buddies told me I was crazy…the fed tightened..Aug 24, 1999, Nov 16, Feb 2, and Mar 21…I sold in early April believing “the Maestro”..

    I contend that this (beginning of the tightening cycle) was the event that began the popping of the tech bubble…

    http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

    So, we go forward to the credit crisis…here we see an entirely different handling (or non-handling) of the crisis…and we all see that Bernanke takes over the fed, and the mess is in his lap from day one…Greenspan has done little in this crisis…

    Now, had Greenspan aged so much that he did not see the similar distortions of the tech and housing markets? I think not…

    As I have written before, a man I bought my farm from told me before the real estate crisis began that he was not buying any additional East Tennessee real estate, that he thought the good times were over, at least a year prior to the first national malaise over these markets.. This man is self made and simply follows the news, and could see this coming, when the MBA’s and CPA’s could not…and I know, as many of my friends are in both crowds…

    Greenspan didn’t treat the financial health of the country like it was his own house…he wasn’t proactive enough..

    Just my opinion…

    Bruce in Tennessee

  4. Mich(^IXIC1881) commented on Jul 27

    I don’t think it matters what Greenspan did or didn’t do. What matters is, how come there are no more protests, civil uproar when confidence surveys are so low.

    One of the major side-effects of “ownership society” or “American dream” is that people can’t even stand up for anything anymore, because now they are “owners”. They can’t stand up to their bosses at work, to corrupt politicians, because now they have mortgages to pay.

    Remember the movie “picture perfect”? Mr. Mercer is giving advice to Jennifer Aniston something to the effect of “that guy has a wife, a huge house, a huge mortgage, so I know he is going to be loyal to me…you, you are single and renting”

    Too much of anything is never good. If America is to grow strong, it needs to break loose its chains, feel the hunger and recreate the passion (not to become individually rich but) to unite as a nation again.

    Currently it looks more like a grand bazaar where everybody is yelling around with no common goal to work towards (other than the goal of finding band-aids hoping to avoid collective failure)

    People look at you disapprovingly when you say “system needs a flush, stop delaying the inevitable, you’re making it worse”, they think “you want IXIC 1881”. I don’t want IXIC 1881, but I will see it as a sign of admitting reality if US were to eventually recover. First step to recovery is self-realization. I don’t see that yet other than on a few blogs.

  5. bc commented on Jul 27

    How can you believe in adjustable rate mortgages then raise rates?

    He should have stuck w. music…

  6. Mel commented on Jul 27

    Let’s not forget his shilling for the Bush tax cuts. He forgot he was supposed to be independent–as did the Supreme Court.

    Put another way, he didn’t create the monster, but he surely Fed it in the end. He failed to do his job, overly low interest rates led to the short term feeding frenzy that his monthly trips to Congress ignored.

    He is not the most guilty because his was failure by omission, Bushco literally was run on/for commission. He can be thought of as the police captain on the mafia payroll.

  7. SteveC commented on Jul 27

    I’d lay 80% of our current dilemma at Greenspan’s feet. He allowed Glass-Steagall to be repealed, he lowered rates unnecessarily in 1997, juicing the economy into 2000, creating a market bubble. In 2002, he looked the other way while the housing bubble and poor lending practices took hold. In his position, he had enormous opportunity for influence over all of these and he failed miserably.

  8. KeynesWasAFraud commented on Jul 27

    Greenspan is a bureaucrat. To believe that a lifelong bureaucrat caused this mess is gross oversimplification at best.

    Certainly his Keynesian policies didn’t help matters (although they should not have surprised anyone considering he was appointed by Ronald “Voodoo Economics” Reagan, the pioneer of modern Keynesian deficit spending).

    The fact is, however, the credit boom which led to the current mess has its roots in a time well before Greenspan was even appointed (at least the early 1980s, probably much further back) – the present real estate crisis is merely the final culmination.

    Even if Greenspan had had the power to raise rates to 10% in 2001 (doubtful for various political and economic reasons) we would merely have had the great credit unwind sooner and in a much more condensed version…in which case our mild 2003 recession would have instead been a monster depression which we would probably still be feeling the results of today.

  9. Douglas Watts commented on Jul 27

    Based on a comprehensive review of all comments on this topic it is obvious that it is foolhardy to think that anyone can really do anything and anything and it is foolish to hold anyone to blame for anything.

  10. Deborah commented on Jul 27

    I blame him a lot. He sold utter non-sense with his untested beliefs around the depression. He was the snake oil master sales man of the century.

    You just look back at the stepping down of interest rates back to the 80s when he got power.

    I wasn’t paying attention to the big picture, but what I saw declining interest rates doing to younger people was horrendous. They got stuck with inflated home prices that gradually inflated relative to wages over 20-25 years.

    Lower interest loans that require a percent of your income to service are far more burdensome then if the rates stayed constant preventing the asset inflation. People are more motivated to pay off debt when rates are higher and that simply makes for a stronger foundation.

    Greenspan didn’t see an ounce, or grain of the massive problem he was creating. That makes him an utter moron.

  11. Rich_Lather commented on Jul 27

    Isn’t the crux of the problem the Greenspan/Bush mix? The problem lay in the fact that interest rates were dropped to historically low levels at the same time we had massive deficit spending.

    The Fed and the government worked together to dilute dollar value, while at the same time making interest rates excessively low. This fueled massive speculation in order to preserve wealth-ie: housing bubble, and perhaps outsourcing.

    I’m not so sure Greenspan is solely to blame. Voodoo economics also played a role.

  12. magnolia commented on Jul 27

    He did his best thinking and writing in the bath tub, for God’s sake. Now we know that HE WAS ALL WET.

    He held too much power over the Federal Reserve Board. Not enough dissention.

  13. BlackSwan2008 commented on Jul 27

    According to an article in the Independent, John Paulson has hired Greenspan. Appears Greenspan will be profiting from his ‘time’ as FED Chair.

    “The man who made a personal $3.7bn (£1.85bn) fortune by predicting the credit crisis is hoping to make another killing by helping to prop up financial companies brought to the brink of ruin by the chaos in the debt markets.”

    John Paulson hedge fund now looks to buy banks

    “With its new-found influence, Paulson & Co has been able to sign up Alan Greenspan, a former head of the Federal Reserve, as an adviser and he is likely to be helpful to the new fund in assessing the capital needs of the banking sector for which he was once the chief regulator.

    The appointment raised a chuckle in dealing rooms across Wall Street when it was announced in January, since Mr Greenspan is being damned as the architect of the housing market’s disastrous bubble.”

  14. David commented on Jul 27

    Greenspan pulled the trigger, but if he hadn’t they simply would have assigned someone that would.

    Fact is that when people want something for nothing their governments attempt to give it to them. Fiat is the favorite tool always has been.

    Only when the people rid themselves of the something for nothing mentality will it be possible to elect representatives that will respect money, credit, and inflation.

  15. Tom commented on Jul 27

    He was correct in his irrational exuberance belief. But after the dot com bust he kept interest rates too low for too long.

  16. Duke commented on Jul 27

    No one put a gun to the heads of banks and told them to loan money to people who couldn’t pay it back.

    No one put a gun to a home borrower and told them to take out a loan they couldn’t handle.

    Greed and stupidity are the causes. Greenspan just made it more easy. Just like gun makers make killing more easy, but it’s the idiots who can’t control their own emotions or don’t think logically about the outcomes of their behaviors who are to blame for the deaths.

  17. Sean commented on Jul 27

    Bill Clinton started this financial mess.

    In Summary Bill Clinton laid the foundation. Alan Greenspan greased the wheels.
    Then, extremely unscrupulous mortgage lenders and banks took full advantage of
    gullible, unsophisticated borrowers.
    By replacing Glass-Steagall with Gramm-Leach-Bliley, banks and investment brokers
    were permitted to consolidate, and the natural system of checks & balances was
    destroyed. Not to mention the conflicts of interest that were born. Yes, Greenspan aided
    the situation by lowering rates and keeping them low, and S&P encouraged risky loans
    by giving them AAA ratings, and many idiot Americans who thought prices would keep
    appreciating need to check themselves into gamblers anonymous, but if I had to go
    back to the beginning, to where this mess started, it would be with Bill Clinton’s
    signature on November 12, 1999.

    http://leavittbrothers.com/chartspeak/ChartSpeak_072708_How%20Did%20We%20Get%20Into%20This%20Financial%20Mess.pdf

  18. JL commented on Jul 27

    Who said that “people have to much equity in their homes”? Hmmm!

  19. larster commented on Jul 27

    Greenspan was not a central banker. He was a political tool. Think of his comments re spending the “surplus”. A cental banker would have considered the coming Medicare/soc Sec bill, but not Dr G. Look no further except to say that anyone that had as many one on one meetings w/bush should have figured out that he was a lightweight.

  20. harlynman commented on Jul 27

    alan greenspan led the commmitee to reform social security in the early 1980’s, that led to increased regressive taxes on the citezenry. he remained silent as the political class spent the money that was supposed to have been saved, and was rewarded with the chairmanship of the federal reserve.

    I consider mr greenspan and many others in both parties guilty of treason for fleecing the american people and their children out of the american dream.

  21. renoDino commented on Jul 27

    He famously said back in 2002 that mortgage lending controls were unnecessary because the free market has learned how to securitize risk. And that boys and girls, pretty much sums it all up.

  22. Drich commented on Jul 27

    Reading the comments, it seems that everyone is truly focused on the policies of his FED. To me, the worst thing that he did was lead the Federal Reserve into the arena of politics. He was afraid that the Clinton administrations successful attempt to develop a surplus and actually start paying down the debt would bolster Social Security and make the dollar, and thus government, stronger. To a true believer of supply side economics I guess that is a frightening prospect.

    Because of this fear he actively led an effort to endorse the Bush tax cuts. Without his express endorsement they would have never sailed through and thus secured the eternal rise of debt he so cherished. A lower debt would have meant the the corporate interests would not be able to maintain the control they had come to enjoy. The low interest rates being continued far too long were just icing on the cake. Add in an off budget war and the phrase “Of, by, and for the corporation” has been secured well into our great grandchildrens’ lifetime.

  23. Dan commented on Jul 27

    Current Mess… Greenspan and the Federal Reserve deserve about 70% of the blame for the housing crisis due to the oddball handling of monetary policy that brought interest rates to all time lows, as well as, the bubble blowing power of the LTCM bailout and associated interest rates.

    As for the dollar, the “War on Terrorism” plus the above Housing issues have substantially weakened the dollar. Maybe half on the wars, and half on the fed.

  24. Andy Tabbo commented on Jul 27

    This is tough one to comment on….

    It’s like kicking a beat dog when it’s already down. A.G. has already been so undressed the last few years, it’s not even worth my time to be piling on now.

    He will be known as one of the WORST Fed Chiefs ever. Period.

    Now. OT:

    So….

    We are throwing 300 billion directly at the “housing crisis”.

    The Fed and gov’t backed institutions have basically fronted $1 Trillion to stop the bleeding.

    We bailed out JP Morgan (the real bailout) by sort of bailing out BSC.

    Hank Paulson wants a Bazooka to protect poor ol’ Freddie and Fannie.

    The SEC made it more onerous to short “certain” sensitive stocks.

    The Federal Reserve has tainted it’s balance sheet by taking on questionable paper.

    We sent out $100bn in checks to “stimulate” the economy.

    And….for all of this effort, the SP500 fell 24% from highs to recent lows and has managed a measly 4% bounce of the lows? What the hell would have happened if the government had done nothing?

    Is anyone else feeling a little nervous? Does anyone else feel like we’re pissing on an inferno here? Either the market has it totally wrong and the Feds have indeed saved the day….or we’re totally screwd….like economic Depression/civil unrest type screwd.

    – AT

  25. Ron commented on Jul 27

    Am I missing something here?

    The Fed can effectively set short term interest rates but this housing bubble has been driven by cheap long term money, much of it foreign. (What did you expect the chinese to do with all those dollars?) The inverted yield curve of recent years showed that long term rates had a mind of their own. I don’t see how Greenspan could have controlled that.

    I blame him for lots of other things – but it seems like the housing bubble was not driven primarily by fed rates.

    What about the SEC and whatever regulators let the brokerages play bank without the capital requirements that banks have?

    I suspect it would be illuminating if someone would post the donations received by each congressman from lobbyists on behalf of the brokerages and banks and Fanny and Freddie. Greenspan seems more like a symptom of the problem than the root of it.

    And if we’re all so smart why didn’t we throw the bums out years ago? Truth is – everybody enjoyed it while it lasted and no one wanted play the prophet and get stoned. Can you imagine any candidate of either major party running on a platform of ‘tougher credit, more austerity, hard times coming?’ How would they raise money and get elected?

    So clear that up for me, would ya please?

  26. Anon commented on Jul 27

    Duke and mac appear to have let the point whiz right by them. Greenspan was head of one of the most powerful institutions in the world. He had an obligation to at least try to minimize the seeds of disaster that are slowly rising to the surface. He didn’t do that. He failed. Move on.

  27. brasil commented on Jul 27

    ..Blame Greenspan Bush parade never gets tired? ..just keep marching in circles to the same old song…my vote is nay..a better place to look might be at who runs them…Corporations with no loyalty, sense of community, (yes how quaint..lol) integrity or care for following laws or even sensible business practices ..an certainly no care for human beings of any country in any other way than a resource to tap…a market to open, cheap labor, resource utilization ect ect..How inspiring..!! ..Yes if we were to really look for full responsibility we might have to start with the stars of last weeks CNBC Hampton’s show from Sag Harbor..that lovely group of insecure small minded posers … hiding behind $20 million dollar 2nd homes and $4 million dollar boats …laughable.. that would require some insight..to not applaud, or admire or wait on every word as if they had some wisdom to share ..they don’t…these sycophant seeking hypocrites are an embarrassment to humanity…by my eye..and the real cause…yet to admit that would be to admit that our own values and desires have to be reckoned with..

  28. wilson commented on Jul 27

    mac – or PC? Every DAMNED DAY.

    Bush is the worst president in the history of the republic. He and his cronies, by sins of omission and commission, have tanked every asset we have ever built.

    As for Greenspan and your swipe at liberals… bwaaaaaaaah. If you can’t see the outright manipulation in every part of today’s macro-economy, then you’re blind. Roosevelt was a piker compared to these social engineers. It’s all about ripping off the taxpayer to backstop the crooks when TSHTF.

    January can’t come fast enough.

    Oh yeah – regarding the post, the last correct thing Greenspan said was “irrational exuberance.”

  29. Mark E Hoffer commented on Jul 27

    People are free to their own opinion, though, this: “Most reasonable people believe this was the last thing Bush wanted in that it would force him into the type of activist foreign policy he had campaigned on avoiding. His pre-911 actions back that up, BTW. No one wanting to engage in risky foreign adventures would ever have picked Colin Powell for SecState.” doesn’t square with readily available information from people like Paul O’Neil, Secretary of the Treasury that came in with, along with aforementioned Powell, GWB’s first Cabinet.
    http://www.ustreas.gov/organization/bios/oneill-e.html

  30. Jeff B commented on Jul 27

    The problem is the fiat system; All paper returns to its intrinsic value: Zero. Who the actors are in is irrelavant.

  31. wunsacon commented on Jul 27

    >> 911’s fallout could have been a HELL of a lot worse for America, in many ways, than it was. The credit for avoiding a lot of that damage goes to Bush and Greenspan.

    The threat of significantly more harm has to be *credible*. The neocons and their media allies ignored all evidence suggesting their concerns were overblown. Yet, you persist in these claims? Sorry, but this merely demonstrates how firmly rooted you are in your partisanship.

    “The only thing we have to fear is fear itself” isn’t always true. But, in the present fiasco, it turned out to be the primary risk. And risk realized! In their zeal to prevent “ultimate calamity”, the neocons and their media allies bungled everything.

    Given the enormous power and influence of the US as the starting position, you could not be any more incompetent.

    The neocon overreaction to 911 has been far more damaging than Osama’s attack. And, since Osama’s plan was probably to involve the neocons in the manner he fought the USSR in Afghanistan, our current situation means the neocons fell into Osama’s trap. Yet, you persist in your claims?

    It boggles the mind to hear anyone defend the neocons’ execution.

    Don’t get me wrong. As to their motivations, I very much understand the neocons and believe their hearts are in the right place. The disagreement is not over the overall goals of defeating religious extremism. We must face these threats. My criticism of the neocons lies in their strategy. There’s the old addage: the road to hell is paved with good intentions. With their “good intentions” but a disregard for truth, justice, the Constitution, and US laws pursuant to ratified international treaties, the neocons are a danger to everyone.

  32. paul commented on Jul 27

    I have read each of the 28 posts before I came to the conclusion – your first post and comments was better.

    Alan Greenspan was One Man – he made decisions based upon Economic Models. He was a theoretician, who was a master of political manipulation – He was naive to the Corruption, deceit, and every negative concept of Greed – that was exponentially present in the big lobbies, Bankers, Money Manipulators – you name it – he didn’t, I think, realize that his greatest “users” were the ugly underground – That have been present (out of hiding) since the early 80’s – he is a victim of his own naivety
    And This is a wonderful country that will stone him to death and hang him with “who didn’t flush the toilet?” BUT – he put himself there!

  33. Mark E Hoffer commented on Jul 27

    “…the candid assessments of former U.S. Treasury Secretary Paul O’Neill, for two years the administration’s top economic official, a principal of the National Security Council, and a tutor to the new President. He is the only member of Bush’s innermost circle to leave and then to agree to speak frankly about what has really been happening inside the White House.”
    http://www.amazon.com/Price-Loyalty-George-Education-ONeill/dp/0743255453

    http://www.cbsnews.com/stories/2004/01/09/60minutes/main592330.shtml

    This man, O’Niell, had the Honor to try to tell us what he knew of what was up. That many did not hear, is not, necessarily, his fault.

  34. wunsacon commented on Jul 27

    Regarding Greenspan, I’m against “diluting” the blame and passing it around. I believe every participant in this deserves blame “full strength”.

    Consider a legal concept known as “joint and severable liability”. At a 4-way intersection, if 2 drivers run a red light and “Malachi Crunch” a driver going thru the green, many states hold those 2 red-light runners “jointly and severably liable” for the damages. Why? Regardless of what the other did, each was required by law to observe driving laws. And what it means is: each is “100% liable” for the damages caused. If one can’t pay, the other is completely responsible.

    In the analogy, the 2 drivers’ acts of negligence occurred with unity of time, unity of place, and unity of “responsibility”. In Greenspan’s case, the acts of negligence occurred across time, across space, and across many zones of responsibility. Yes, in Greenspan’s case, many people ran red lights. (For the sake of gross simplicity, I estimate more than half the country is responsible for this mess, including most politicians and partisans supporting our 2-party duopoly.) But, when we talk about Greenspan being the serial bubble blower, keeping interest rates too low, and not sounding alarms (ala David Walker for a nice contrast), then I consider Greenspan 100% responsible for those actions.

  35. Robert commented on Jul 27

    I would have more respect for this thread if the people posting read AG’s book. Saying “I don’t need to read his book because I know he’s an idiot” strikes me as haughty.

  36. Mark E Hoffer commented on Jul 27

    also, why do people think this:
    The problem is the fiat system; All paper returns to its intrinsic value: Zero. Who the actors are in is irrelavant.

    Posted by: Jeff B | Jul 27, 2008 11:01:05 PM

    is a theory?

    it, too, is readily provable with easily accessible factsets.

    facts, happily enough, are still readily knowable.

  37. ssm commented on Jul 27

    The problem is this insane belief that such a small group of men (the Fed) can possibly be capable of ‘fine tuning’ monetary policy and not make lots of mistakes.

    The market makes billions of decisions every second and these guys are supposed to analyze all the data and ‘tune’ things just right?

    Look at the history: The Fed was created to smooth out the business cycle and avoid the wild swings experienced in the first part of the 20th century. But, after the inception of the Fed these swings have been *far* worse than before.

    Design flaw. And a very expensive one. Fiat currency – bad. Fractional reserve banking – bad. Government deficit spending – bad. High taxes – bad. Public insurance – bad. Central bank control – bad.

    Abolish the Fed and debate how to exist without it.

  38. lark commented on Jul 27

    “By replacing Glass-Steagall with Gramm-Leach-Bliley, banks and investment brokers were permitted to consolidate, and the natural system of checks & balances was
    destroyed.”

    Note that ‘Gramm’ above is none other than Phil Gramm, McCain’s economics advisor until recently.

    McCain is running with by and for crony capitalists. Be afraid. Very afraid.

  39. Steve Barry commented on Jul 27

    Greed and stupidity are the causes. Greenspan just made it more easy.

    I have to get this message through if it kills me…this crisis is 20 years in the making (BTW, Greenspan chaired the Fed practically the whole time). It boils down to the same old argument…can the Fed chairman discern when a bubble exists and prevent it from further expanding out of control? The chart looks to me that on his first day in 1987, a smart Fed chairman would have noticed a debt bubble forming. By 2000, a 5 year old could have seen it. What he did was simply allow the greatest debt bubble in the history of mankind. Now what?

  40. wunsacon commented on Jul 27

    ssm,

    >> Abolish the Fed and debate how to exist without it.

    I hear ya! But, I propose we reverse the order of these two steps! ;-)

  41. Mr. Bubbles commented on Jul 27

    Mich said:
    “Too much of anything is never good. If America is to grow strong, it needs to break loose its chains, feel the hunger and recreate the passion…”

    Reminds me of that cool animated short film, “More”:

    http://despair.com/more.html

  42. Northern Observer commented on Jul 27

    Greenspan’s biggest crimes are:

    1 – testifying before Congress that the Bush Tax cut would not be deficit creating; which was an outright lie. This big lie was the green light for the why me worry spending you have seen out of Bush and Congress.

    2 – interfering so that state regulators could not fix lax lending standards in the mortgage market.

    I actually don’t think he was that bad on rates. He just under regulated banking and took a devil may care attitude that was bound to lead to overheated credit and a bust. He is Ayn Rand’s joke on America.

  43. Northern Observer commented on Jul 28

    Design flaw. And a very expensive one. Fiat currency – bad. Fractional reserve banking – bad. Government deficit spending – bad. High taxes – bad. Public insurance – bad. Central bank control – bad.
    Abolish the Fed and debate how to exist without it.
    Posted by: ssm | Jul 27, 2008 11:36:20 PM

    Buy a good book on the history of banking in England and America. Preferably one that is not from the Austrian economists out of Alabama because they are preaching a religion, not economics.
    What you will see is that private money systems are prone to even more frequent and violent boom bust cycles. There is a reason the institutions that exist today were created; it was not some back room plot to control the world.
    What we are seeing today is what happens when someone who doesn’t believe in the system (greenspan) gets to run it. What you get is self destruction of the credit structure as the head honcho fails to do his job because he doesn’t ‘believe in it’
    Only in America…

  44. Troy commented on Jul 28

    As I posted in the other thread, a picture is worth a thousand words.

    That graph is net household mortgage lending, 1995-2008.

    Note that 2008 is on track to be back to 1998 levels.

    See that $600B line? Everything above that has the potential to be dead loss IMO, recoverable for 30-50c on the dollar if the system can recover soon.

  45. John commented on Jul 28

    As someone above says the problem was the Greenspan/Bush mix. To use Bush’s metaphor: Greenspan gave the drunks the keys to the liquor store, and Bush sent the cops on vacation.

    Philosophically Greenspan is, or perhaps was, a doctrinaire conservative economist and disciple of the free market philosophies of Ayn Rand and others. And not all of these are bad some are positive and reflect reality. His hands off attitudes didn’t matter too much when Bush senior and Clinton were in office because basically they both pursued sound money, fiscally conservative, free trade policies with a fairly tight regulatory climate and as Greenspan’s book make’s clear he had a total rapport with Clinton/Rubin/Summers. They all had a stroke of luck with the dotcom boom which produced a huge spurt in productivity and whose long term effects despite the bust at the end were generally benign. Despite a lot of paper wealth and shareholders money disappearing down the drain the numbers of people employed in the failed ventures were relatively small and the impact on the wider economy fairly slight. The problem was the dotcom bust actually happened on Bush’s watch, although the signs were already there, and he and Greenspan were desperate to avoid a major economic slowdown on his watch. So while Bush and his allies in the congress cut taxes and ramped up public spending at the fastest rate since Johnson, Greenspan rapidly reduced rates and kept them low long after it was clear the contraction was actually going to be brief and shallow. At the same time the regulatory climate was greatly relaxed despite outrages like Enron and the consequent Sarbox which produced the appearance of tightened standards. In fact because all the key agencies were stuffed with extreme conservatives, many of them totally incompetent, serious regulation became a dead letter. Greenspan issued nary a peep about the huge tax cuts, the Keynesian increase in public spending, the huge increase in M3, or the lax attitude of regulators. Partly this was philosophical, he many times for example said that it was not the job of central bankers to deflate speculative bubbles, and part of it was he wanted to keep his job (ie. get reappointed).

    In summary then the charges against him are that post 2000, because his record up until then was fairly good, he ushered in a period of extreme loose monetary policy and colluded with, or at least turned a blind eye to, fiscally irresponsible and lax regulatory policies by Bush. There’s no doubt he’s guilty as charged because who can doubt that if he’d tightened money and made a fuss a lot of this stuff wouldn’t have happened. He probably wouldn’t have been reappointed either.

    So I’d say he carries 40% of the blame. The administration gets another 40%. And the rest can be allocated between the financial institutions and the small fry who sold mortgages etc.

  46. bdg123 commented on Jul 28

    It’s becoming harder and harder to convince people Greenspan is the root of all evil as the people start to realize the criminality of what has happened across a multitude of topics. This has nothing to do with housing and more and more of this will become apparent as time goes by. Housing is simply a symptom. This is Wall Street’s mess Barry. And, I don’t know why you are so reticent to say so other than so many of your acquaintances work there.

    Greenspan didn’t throw money out the windows in private equity deals, commercial real estate, residential real estate, emerging markets, credit cards, consumer loans, highly leveraged investments, loans to highly leveraged hedge funds, derivatives and on and on. And, not only did they do so, but they used our deposits to do all of this after the Chinese Wall was broken after deregulation and after they learned to provide unlimited loans by skirting regulation. And, this is not a consumer problem either. We have consumer protection laws to keep oorporations from preying on them as has been happening. Were individuals greedy? Sure. But Banks did all of this.

  47. John commented on Jul 28

    Northern Observer:
    Concur broadly with your observations about what happened after 2000 but they don’t explain why his free market philosophies didn’t prove corrosive in the late 80’s/90’s. I really think it’s one of those situation where you have two chemicals that are harmless or even benign on their own but when combined become toxic. The reasons were complicated.

  48. John commented on Jul 28

    bdg23:
    All you say about banking greed and irresponsibility is true(so what’s new) but you’re loosing sight of the wider strategic reality. None of this would have happened if they hadn’t had access to cheap money and an almost total absence of oversight.

  49. Sean commented on Jul 28

    Greenspan – The Fed chairman advocated going to war to protect the Strait of Hormuz from attack and control by Saddam. Greenspan was truly delusional back in 2003, which was long after Gulf War I and Saddam had no Navy or Air Force to attack with, Greenspan should have been removed from office at that point, since he obviously was not thinking clearly.

  50. mark commented on Jul 28

    It is not coincidence, I think, that we have come to the end of the cheap oil bonanza concurrent with the end of empire and all that portends. Mr. Greenspan played his part as we all did in the age of excess made possible by cheap energy. Many things are coming to an end no matter our collective “wish” that they continue. I have been more than critical of the era of cheap money, which leads to cheapness in all things societal, however, Greenspan is only the point man who gets the most arrows, we are all to blame. The Jiminy Cricket economy is about to get slapped upside the head by reality.

  51. Kat commented on Jul 28

    His worst call was to urge people into adjustable mortgages when rates were at the lowest level.

    Bill Fleckenstein describes in detail Greespan’s incompetence in his book. A great read.

  52. bdg123 commented on Jul 28

    John, I see you are the poster child for clowns as you chase my comments around. If you had read my blog, you’d know I said this would happen on some level years before it unfolded and I have been writing about the deregulated environment that created it for years as well. So, please don’t take my three sentences I post on here as my perspectives in their entirety and put words in my mouth to show your vast knowledge of nothingness. I already know you don’t know what’s going on based on your last attempt to do so. All of this said, to blame Greenspan – as you did in your last comments directed at me – shows your lack of knowledge of how systemic this problem is and how little you know about what is going on.

  53. Patrick commented on Jul 28

    Meh, he didn’t screw up that bad. However, I have to say that the whole supposed deflation scare (which led to the drop in rates, rising home prices, etc.) was a bit amateur.

    That being said, given that it was right around 9/11 and everyone and their mother was freaking out, I don’t feel that offended that he gave in to the political pressure to inflate the economy—everyone else did, and, frankly, I’m less concerned by his towing the economic line than I am that hundreds of elected politicians caved in and wrecked the constitution, threw us into war, and generally screwed us over for decades.

    A bit of inflation, by comparison, ain’t that bad.

  54. Northern Observer commented on Jul 28

    Posted by: John | Jul 28, 2008 9:04:39 AM

    I agree. To get what America has now you need multiple failures at different structural supports.
    Greenspan was just one of those supports; not the monocause.

  55. John commented on Jul 28

    bdg123:
    I’m not chasing anyone around. You come here and make facile remarks which usually mix cause and effect and I occasionally comment on the more illogical. Based on the personal abuse in your comments which give a fair indication of your maturity, I’d say it was unlikely I’ll ever read your blog.

  56. Estragon commented on Jul 28

    Steve Barry has it right. AG demonstrated a consistent pattern, starting with his role in the 1987 stock market “crash”.

    As those of us of a certain age might remember, the mid-80’s were a time of increased risk taking (commercial property and LBO’s in particular) and decreasing risk premia. Inflation and interest rates had come down, but the memory of the late 70’s / early 80’s inflation was fresh and at the time, it wasn’t certain that inflation had been totally beaten. As it turned out, consumer price inflation was well contained, but a long era of asset (and liability) price inflation began.

    In the fall of 1987 it had become pretty clear that asset prices had risen too far too fast, and cracks appeared. The proximate cause of the October crash is still debated, but it’s clear the underlying reason was a sudden reversal of asset price inflation, in other words the popping of a bubble.

    It’s impossible to know what would have happened had the bursting been left to scar overextended participants. In the event, AG et al intervened to mitigate the bursting of the stock market bubble, asset prices recovered quickly, and the Greenspan put was born.

    Like the GSE guarantees, the Greenspan put was never explicit. Also like the GSE guarantees, it became increasingly clear that the put was real though, and debt supported asset price increases followed.

    Even after Greenspan, the put clearly remains. Like the GSE guarantees, it simply can’t be revoked without causing a huge systemic seizure. The very nature of the put is such that it can only be credibly revoked at a time of real stress in the financial system.

    Greenspan’s legacy therefore is a groundhog day cycle of bubbles, which will continue until it can’t. No doubt some good came out of the put. The computer and internet world as we know it might not exist to the extent it does, for example. Still, when the put finally does expire, we may wish we’d just toughed out the pain of the 1987 crash and left the scars as a reminder of the cost of underpricing risk.

  57. bdg123 commented on Jul 28

    I really don’t care what you read. But, I do know that your calls on my posts show you are utterly clueless. And, if I am immature for saying so, I can surely live with that.

  58. Sam in Mississippi commented on Jul 28

    I never understood why Greenspan just didn’t raise margin requirements during the dot com days instead of raising interest rates. He put the economy in the tank to curb stock market specultation when he should have put the brakes on the over-leveraged day-trading addicts.

  59. George commented on Jul 28

    Great comments and a very interesting discussion to read. I have to say I trend towards David’s comments that if he had not taken the easy money approach that Bushco wanted he simply would have been replaced with another lackey. To think they would do this in the military arena (Shinseki) and not in the economic realm is foolhardy.

    He was simply doing as the executive branch wanted.

  60. joebek commented on Jul 28

    Materially, Greenspan is completely responsible. However, formally it is firstly the universities and secondarily the journalists. Anytime a society gets into as much trouble as the US, the universities have to be held accountable. And the journalists were cheerleading the entire time of Greenspan’s reign. They were and continue to be abysmal.

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