Alan Greenspan = Liar

I don’t normally call people liars, but when someone who severely damaged the world economy claims he’s blameless, I lose my normal restraint.

Amazingly, Alan Greenspan’s still claiming “The Fed Didn’t Cause the Housing Bubble”. His chief argument is that the Fed controls only short-term interest rates, not long-term rates:

The interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages.

David Fiderer dismantles this disingenuous argument in “How Dumb Does Alan Greenspan Think We Are? Very”.

[After] 2001, Greenspan lowered rates relentlessly in order to prime the economy for the 2004 election. By mid-2003, the fed funds rate was one percent, a 45-year low. Mortgage rates for both FRMs and adjustable rate mortgages (ARMs) fell dramatically, but rates on ARMs fell more. And this is a critical point. By early 2004 the rate difference between FRMs and ARMs was two percent, the highest it had been in 10 years. In other words, if you had a $120,000 mortgage, your monthly payments would have been $200 less under an ARM.

The bigger the rate difference, the more likely homeowners are to elect to finance with an ARM… In early 2004, when 5-year ARMs hovered around four percent, compared to FRMs at six percent, the refinancing risk associated with an ARM was much greater.

And it was precisely at this point, going into an election year, when Greenspan threw gasoline on the fire, encouraging homeowners to try ARMs. “Greenspan says ARMs might be better deal,” was the USA Today headline on February 24, 2004. “Alan Greenspan said Monday that Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives,” the paper reported.

When Greenspan spoke, people listened. So by March 2005 the percentage of homeowners taking out adjustable-rate mortgages hit an all-time record, at 36%. In 2001, it was 12%. In 2002, it was 17%.

Moreover, ARMs were concentrated among the riskiest types of mortgages in the riskiest markets, as we see from statistics from the New York Federal Reserve. These are the markets, and the mortgages, that drove the bubble and the financial crisis we face today.

And this doesn’t even mention the Fed’s role in utterly failing to crack down on systemic fraud in the mortgage and banking industries that gave mortgages to people who obviously couldn’t pay.

Posted by James on Thursday, March 12, 2009