Greenspan’s Delusions Get Much Worse With Age: Caroline Baum
Commentary by Caroline Baum April 7 (Bloomberg) -- In case you missed the first legacy tour, former Federal Reserve Chairman _Alan Greenspan_ (http://search.bloomberg.com/search?q=Alan+Greenspan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_ dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) is back for Part II. Starting with an academic _paper_ (http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2010_spring_bpea_papers/spring2010_greenspan.pdf) presented at the Brookings Institution on March 19 and followed by several TV interviews, “Dr. Greenspan,” as his interviewers politely refer to him, has acquired the clairvoyance he lacked at the Fed. Asked in a Bloomberg TV interview about a possible bubble in China, Greenspan said there were “significant bubbles in Shanghai and along the coastal provinces” and “some of that in the hinterlands.” He of the Can’t-See-a-Bubble-In-Advance School now recognizes region-specific bubbles halfway around the world? As for Greenspan’s claim that only a few predicted the post-bubble fallout, “that’s preposterous,” says _Bill Fleckenstein_ (http://search.bloomberg.com/search?q=Bill Fleckenstein&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd &ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) , president of Fleckenstein Capital in Seattle. “I had time to write a _book_ (http://www.mcgraw-hill.co.uk/html/0071591583.html) about it.” The book, aptly named “Greenspan’s Bubbles,” was written in 2007 and published in January 2008. Greenspan told Bloomberg TV neither he, nor anyone at the Fed, heard about problems brewing in the banking system. That’s patently false. I know for a fact that regulation and supervision division staff at some of the Federal Reserve District Banks reported risks and irregularities to the Board in Washington. Unheeded Warnings The late _Ned Gramlich_ (http://search.bloomberg.com/search?q=Ned+Gramlich&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=U TF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) , a Federal Reserve governor from 1997 to 2005, pressed Greenspan to increase the bank’s oversight of subprime mortgage lending starting in 2000, clearly to no avail. Greenspan’s _response_ (http://online.wsj.com/article/SB118134111823129555.html) ? He told the Wall Street Journal in June 2007 he didn’t recall discussing the idea of sending examiners to home-loan units of Fed-regulated bank holding companies. Greenspan, who was never an academic economist, chose an academic forum last month to present his most detailed defense of his stewardship of monetary policy. The paper is filled with R-squareds and t-statistics and interspersed with quotes that make him look prescient (“irrational exuberance”) and praise that can’t be retracted (from the late _Milton Friedman_ (http://search.bloomberg.com/search?q=Milton+Friedman&site=wnews&client=wnews&proxystyl esheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&so rt=date:D:S:d1) in 2006). It’s sad that Greenspan can’t let go because he’s making things worse for himself. His analysis of why monetary policy could not possibly be to blame for the _housing bubble_ (http://www.bloomberg.com/apps/quote?ticker=SPCSUSAY:IND) is seriously flawed. It was low long-term rates, depressed by capital inflows, that were responsible for the bubble in residential real estate, he claims. Convoluted Conclusions Surely one of the hundreds of economists on the Fed staff could have explained to him that the long rate is the sum of the current and expected future short-term rates. If long-term rates are too low, jack up short-term rates more aggressively rather than in quarter-point increments. He can’t plead not-guilty. Greenspan says originations of adjustable-rate mortgages, which are geared off the federal funds rate, peaked two years prior to housing prices, absolving him of any blame. His numbers prove nothing. Just eyeball a _graph_ (http://www.bloomberg.com/apps/quote?ticker=MBAVARM%:IND) of the federal funds rate and ARM volume as a share of total mortgages during the period in question. With the _funds rate_ (http://www.bloomberg.com/apps/quote?ticker=FDTR:IND) at 1 percent, the ARM share exploded from less than 15 percent in the first half of 2003 to a peak of 36.6 percent in March 2005, by which time the benchmark rate stood at 3 percent. Home prices _peaked_ (http://www.bloomberg.com/apps/quote?ticker=SPCSUSA:IND) in the middle of 2006. Lending standards were easing quicker than the Fed was tightening. As short-term rates moved up, potential homeowners moved out -- to 30-year fixed-rate loans. If those rates were too low for his taste, Greenspan should have raised the rate directly under his control. Mea Culpa Greenspan was a big cheerleader for adjustable-rate mortgages in 2004. He dismissed the idea that record levels of household debt were a problem as long as people could _service_ (http://www.bloomberg.com/apps/quote?ticker=DSPBTOTL:IND) it, courtesy of his super-low interest rates. He repeatedly rejected the notion of a housing bubble, admitting belatedly that there might be some “froth” in the residential real estate market. He gave political support to the Bush tax cut in 2001 because -- get this -- unless the government reduced taxes, there would be no more _Treasuries_ (http://www.usdebtclock.org/) for the Fed to buy to conduct monetary policy! He refused to raise _margin_ (http://www.bloomberg.com/apps/quote?ticker=MARGDEBT:IND) requirements in the late 1990s to defuse the _technology stock bubble_ (http://www.bloomberg.com/apps/quote?ticker=CCMP:IND) , arguing publicly it would have no effect. (Privately, he acknowledged it would curtail the bubble but might nail the economy in the process.) He advocated a “ risk-management” approach to monetary policy and failed to exercise even a modicum of risk- management during two asset bubbles on his watch. Wrong About Everything? Could anyone have been more wrong about so many things than Alan Greenspan? And now he has the chutzpah to rewrite history? He will certainly give it another whirl at today’s _hearing_ (http://fcic.gov/hearings/04-07-2010.php) of the Financial Inquiry Crisis Commission. To his credit, Greenspan warned about the bloated balance sheets of Fannie Mae and Freddie Mac. And he sniffed out the increase in _productivity growth_ (http://www.bloomberg.com/apps/quote?ticker=PRODNFRY:IND) in the 1990s -- and then did nothing to raise real interest rates. Greenspan can command high fees for speaking engagements and consulting work for select clients. He cannot write his legacy. History will do that for him.
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