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Greenspan Joins Gramm in Rejecting Blame for Financial Crisis
Three weeks after former Texas Senator and UBS vice chairman Phil Gramm took to the pages of the Wall Street Journal to reject any blame for the meltdown of the American financial system, Alan Greenspan followed suit. In an op-ed Tuesday, the former Fed Chairman, too, denied paternity for the crisis, refusing to accept that" the 'easy money' policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess."
Of course, Alan Greenspan's they-a-culpa shouldn't surprise anyone. After all, in early 2004 Greenspan was cheerleading adjustable rate mortgages for Americans even as housing prices were nearing their peak. Perhaps after previously admitting he was "embarrassed by my failure to foresee" the 1980's savings and loan crisis and acknowledging "I made a mistake" with his faith in the self-correcting self-interest of Wall Street financial institutions, Alan Greenspan decided he enough of the blame game.
In his Journal screed today, Greenspan deflected responsibility for the financial calamity away from his doorstep and towards structural changes in the global economy over which he had little control:
"The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages."
Nowhere to be found in Greenspan's evasion today, however, is any mention of adjustable rate mortgages (ARMs). That omission is to be expected. Five years before the New York Times, Time and a host of economists (many his colleagues) each highlighted Alan Greenspan's critical role in the build up to the subprime mortgage crisis, others warned of the looming disaster - and his essential part in manufacturing it - years ago.
In a stunningly prescient April 2004 article ("There Goes the Neighborhood") in the Washington Monthly, Benjamin Wallace-Wells argued that home prices were about to plummet and take the economy down with them.
During the last week in February [2004], when Greenspan recommended that the home-owning public take a good hard look at switching from fixed-rate mortgages, under whose terms payments stay the same no matter what interest rates do, to adjustable rate mortgages (ARMs), where payments fluctuate along with interest rates--which, right now, makes close to zero sense. Interest rates are lower than they've been in 30 years, and, with all economists predicting a general economic upturn, and Bush's budget deficit and the weak dollar sucking up capital, little doubt exists that interest rates must rise, in which case, switching from a fixed-rate to adjustable-rate mortgage would be pretty costly for any family naive enough to take Greenspan at his word. The episode did not pass completely without critical notice. It was "the strangest bit of advice ever to be proffered by an American central banker," Jim Grant, publisher of Grant's Interest Rate Observer, told the San Francisco Chronicle. Then the press moved on: "Oh, it's just Greenspan"...
...Greenspan's rather ham-handed effort to get them to go for ARMs, is a sign not of the chairman's own eccentricity or advanced age, but, instead, of the economy's current unsteadiness. Greenspan knows, perhaps better than anyone, that this economy is perched nervously on top of a wobbly, Dr. Seuss-like tower. Our recovery is propped up by consumer spending, which is in turn propped up by mortgage refinancing, and if that refinancing dries up before more props can be put in, the whole edifice could fall. "Since long-term interest rates cannot fall low enough to facilitate another wave of fixed-rate refinancings, he is trying to encourage homeowners to refinance one last time: fixed to ARM," Peter Schiff, president of Euro Pacific Capital in Los Angeles told the San Francisco Chronicle.
Over the previous five years, Americans had extracted almost $1.6 trillion in cash from refinancing and spent virtually all of it on consumer goods purchases. As Wallace-Wells noted four years ago, "Greenspan has played enabler to this boom," and concluded:
"To get out of the recession, he had to rely on, stay mum about, and even encourage a housing bubble. Now, that very bubble may be the thing that destroys the recovery he has sought to create."
For his part, Greenspan admitted as much last week in a CNBC interview featured in its special investigation of the financial crisis, House of Cards. Among other jaw-dropping statements, CNBC noted, "Greenspan also admits that he was puzzled by the more complex mortgage-backed securities on the market." And in language that echoed his Lincoln Financial mea culpa twenty years prior, Greenspan last fall concurred with Rep. Henry Waxman's question, "You found that your view of the world, your ideology was not right, it was not working?"
"Absolutely, precisely. You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well...
...I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."
With the simultaneous collapse of his worldview and the world economy, Alan Greenspan last month grudgingly acknowledged:
"It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring. I understand that once in a hundred years this is what you do."
Judging by his Wall Street Journal op-ed today, for Alan Greenspan taking responsibility is a once-a-century occurrence as well.
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Oh God. Please make it stop.
Posted by Leslie on March 11, 2009 1:00 PM