Wednesday, December 12, 2007

‘The Undertaker’ Tries to Bury his Past



The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall….

—Alan Greenspan, The Wall Street Journal



Thus former Fed Chairman Alan Greenspan ("Easy Al" to his detractors and "The Undertaker" to his mentor, Ayn Rand) begins his latest attempt to rewrite history, in a remarkable op-ed piece in today’s Wall Street Journal: “The Roots of the Mortgage Crisis.”

And NotMakingThisUp is happy to report that today’s piece is every bit as full of bizarre self-justifications as Greenspan’s recent autobiography, “The Age of Turbulence.”

(That book is so off the charts that we speculated the working title must have been “Purple Haze, All in My Brain, Rainy Days You Don’t Seem The Same, One Pill Makes You Larger and One Pill Makes You Small, but I Get High With a Little Help From My Friends so Why Does it Feel Like They’re All Staring At Me?”—see “‘The Undertaker’ and his Economic Doobie Brothers” from November 18).

Now, we all know what Greenspan is up to here, don’t we?


Greenspan—the most revered Fed Chairman of all time, except by the gold-bugs, economic Cassandras and short-sellers who fruitlessly fought his easy money policy for nearly 20 years—wants desperately not to be blamed for the housing bubble that his easy money policy caused.

To paraphrase Pink Floyd, that’s what the writing’s all about, and Greenspan makes no bones about it in the heart of today's piece, 10 paragraphs down:

After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own. There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century.

In other words, Alan Greenspan wants us to believe that the most powerful Fed Chairman in U.S. history was powerless to stop the greatest housing bubble of U.S. history, despite the fact that he stood at the monetary control button that directly inflated that bubble.

But he’s a Republican, and a cagey politician at that, so he’s not going to try to avoid responsibility altogether:

I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices.

Thus Greenspan opens the door to an admission of what any—and I mean this literally—fool knows: that his 1% pedal-to-the-metal interest rate policy during one of the great world economic booms of all-time had everything to do with the ensuing drama.

But he opens the door no further, and quickly shuts it with this whopper:

In my judgment, however, the impact on demand for homes financed with ARMs was not major.

Before you have time to spit out your coffee, “Easy Al”—as he was known throughout his brilliant career—tries to explain himself with an outright fake conclusion from a meaningless data point:

Demand in those days was driven by the expectation of rising prices -- the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted). [Emphasis added]

The fact that home prices continued to rise after the peak of ARM originations—“seasonally adjusted”!—is as meaningless as anything else in this tract. Anybody who knows anything about free markets knows that incremental demand by uninformed buyers is what drives bubble prices to their peaks.

The rest of “Roots” is a tale told by a politically savvy retired Fed Chairman eager for long-term glory, full of data and the kind of “woulda, coulda, shoulda” self-justifications that don’t mean a thing to the poor shlub enticed into a low-interest ARM five years ago when “Easy Al” set a marginal interest far below the true rate of inflation.

Which, by the way, is the true root of the mortgage crisis.

Unfortunately that’s not long enough for an op-ed piece in the Wall Street Journal.


Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

18 comments:

Richard said...

"The surge in competitive, low-priced exports from developing countries, especially those to Europe and the U.S., flattened labor compensation in developed countries, and reduced the rate of inflation expectations throughout the world, including those inflation expectations embedded in global long-term interest rates."

Well at least he acknowledges the deflationary effects of the Chinese labor markets.

Ryan said...

People who bought ARMs knew (or should have known) the risk they were taking. They saved a lot of money over the first 5 years of the life of their loan, and they are being asked to pay the piper now. Additionally prime vs subprime is a separate issue (there are prime ARMs and subprime conventionals), banks took a risk they perhaps should have not taken with subprimes. I bought a conventional 30 year fixed knowing that the monthly payment would actually go down as time went past, due simply to inflation, so the first 2 or 3 years of my home purchase are the most painful.

Here is the real crux of the problem: the banks can foreclose and lose money as the properties are no longer worth enough to cover the outstanding mortgage. The second option is the banks can freeze the rates and not adjust up so they continue to earn at least a small amount of money, but they will still take some loss. ARMs are not the primary issue, bad lending decisions on the bank's part is the real issue, and they should be held responsible.

A counter example is if a buy a CD and then rates go up. I don't get to have my earnings rate increased (generally speaking) so the bank pockets the addiitonal revenue it earns lending my money out.

Question said...

Q: How confident can we be in identifying…bubbles, and if we can’t be confident, what’s the role of the central bank in dealing with these events?

First, I think that many distortions in asset prices have arisen historically because of various kinds of structural regulatory problems in the underlying markets. For example, research on historical episodes suggests that large asset price increases are sometimes preceded by credit booms. In many cases this pattern results from the fact that the country in question deregulated its banking system, giving banks extra powers, but did not enhance the supervisory structure adequately at the same time. The result is that institutions have an incentive to make economically bad investments, to take advantage of the “put” provided by the government safety net.

So you could have a situation where a badly managed deregulation of some financial market, such as in the case of our own savings and loan crisis or in episodes during the 1980s in Japan and Scandinavia, has the potential to create a one-way bet that generates a destabilizing move in asset prices. It’s extremely important for central banks, or for financial supervisory agencies in those countries that have them, to ensure that the underlying microeconomic regulatory structure is such that moral hazard and misalignment of incentives are not pervasive in the system. More often than not, such moral hazard problems are the source of asset prices becoming disconnected from fundamentals. So good oversight of the banking system and of the broader financial system is one very important way in which central banks or other agencies can prevent these kinds of problems.
Ben, 2003

Bruce said...

Easy Al is living in the fertile green valley of senility as he paddles down that famous Egyptian River.

What an asshat.

tscott said...

And so the role of S&P and Moodys as facilitators along with the hedge fund industry is of little to no significance?

Seems to me that, in the absence of the AAA rating, the synthesis of "easy money" 12 to 1 leverage funds would not have been possible and the market into which banks and other originators sold these mortgages would not have existed.

jwong said...

I wish it were so simple to say that easy credit created the bubble. Yes it had the most influence, but where was the regulation? We have all sorts of Fed Regs controlling margin buying. Where was the Fed when 100% financing was being lent? We need stricter income verification and down payment requirements. For one, the income requirements might magically increase income tax receipts. And down payment requirements would decrease loan defaults. Although, I would like to believe that rational adults should be free to make their own financial decisions, it is apparent that a great percentage of us are neither rational or adults.

jwong said...

I wish it were so simple to say that easy credit created the bubble. Yes it had the most influence, but where was the regulation? We have all sorts of Fed Regs controlling margin buying. Where was the Fed when 100% financing was being lent? We need stricter income verification and down payment requirements. For one, the income requirements might magically increase income tax receipts. And down payment requirements would decrease loan defaults. Although, I would like to believe that rational adults should be free to make their own financial decisions, it is apparent that a great percentage of us are neither rational or adults.

mike volpe said...

I am a mortgage broker myself. Initially when I read the piece and began having similar thoughts to you, I thought that maybe I was exhibiting a great deal of hubris. After all, Greenspan is brilliant. That said, after I thought about it for a second, I think he is trying to skirt responsibility.

There is one thing I want to note. I don't believe I ever heard Greenspan say he was lowering rates to avoid deflation when he actually did it. Correct me if I am wrong however I remember him saying that it was to counter a recession.

I don't put much blame on him for suggesting ARM's. Where he is responsible is in lowering the Fed Funds rate as low as he did as long as he did. He created the loose money that eventually wound up in the mortgage market.

Here is how I analyzed it.

http://proprietornation.blogspot.com/2007/12/alan-greenspan-tries-to-rewrite-history.html

Here is my full analysis of the roots and aftermath of the mortgage crisis.

http://proprietornation.blogspot.com/2007/11/from-boon-to-crisis-truth-about.html

Michael said...

RE: tscott

Castigating the ratings agencies over their perceived jobbery is natural, but unavailing.

It can be argued that ratings agency relationships are no different than the existence of capital market/institutional sale relationships under the same IB roof.

Equity analysts went through the same sort of negative criticism during the dot-com era, but ultimately they proved to have few substitutes and eventually investors realized that analysts, more often than not, do more intentional good than intentional harm.

RA's actually have less conflict as they are either independant (MCO) or owned by a non-financial (S&P, owned by MHP the publisher).

So they did bad work, but that's merely the result of the innovation horse getting put before the financial plumbing cart.

Goldenpiggie said...

Rebuttal coming:

http://www.amazon.com/Greenspans-Bubbles-Recklessness-Federal-Reserve/dp/0071591583

BBL Jr said...

Greenspan made the money cheap. But fee seeking lenders decided credit worthiness was an old fashioned concept. Twenty per cent down would have stopped a lot of these loans and cushioned the loss from the rest.

Sam E. Antar said...

To Alan Greenspan:

It's time to hang up your cleats, leave the stadium, and spend time with your grandchildren.

With respect,

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

cadamyale said...

Well said, Sam. What is with this guy continuing to run his yap? Last I checked, it is not the role of the FORMER fed chairman to regularly opine on the state of the economy.

Michael said...

RE: Michael's comment about tscott

*ahem, sadly, i've seen that iPod Nano commercial one too many times, and that ridiculously catchy song has caused me to break down and lose control of my idioms (cart before the horse...horse before the cart...curse you, Feist!)

now...must...go...buy...iPod...

T said...

I'm no fan of Greenspan. His keeping fed funds rate at 1% for so long was no doubt partially contributed to what has been happening. But let's face it: was he solely responsible for all these things? Please. Don't be so naive. What about the misjudgment and greed of millions and millions of speculators and flippers around the world, including the Wall Street predators?

So the Fed is supposed to do all these things that Wall Street and other investors/speculators expect them to do to keep the economy humming along and everyone happy. Now they complain that the Fed was irresponsible for not acting like their parents to advice and/or prevent them from doing the wrong thing.

Where were all these people that criticized Greenspan when things were doing well before the stock bubble burst and before the housing bubble crashed ? Instead, he was the "greatest Fed chairman", the "Maestro" that saved us from crisis to crisis, the one who's responsible for all these great things that happened to the economy.

The Greenspan's put was just the catalyst, not the real cause of all these troubles that we're experiencing. The cause was the insatiable greed and herd mentality/predatory practices of Wall Street, and other stock investors/speculators and house flippers that took advantage of low rates and their victims' trust and gullibility.

Those speculators that currently whine about Greenspan and the Fed should wake up and look at themselves in the mirror. Had he tried to raise rates aggressively to stop the stock market bubble, or listened to Gramlich and started cracking down on predatory lending, these same people would have bemoaned: "he caused the economy and stock/housing markets to grind to a halt", or so to that effect.

As it's become obvious, Wall Street and the housing/mortgage predators, after praising Greenspan and the Fed for helping them prosper during good times, now are lamenting that he was the cause for their downfall, and expect the next Fed to come to their rescue. Stop behaving like dumb cry babies. These are the greedy parasites that want to privatize profits and socialize losses.

These predators are like misbehaved children who want their parents to give them freedom to do what they want, because they think they are responsible grown-ups and don't need supervision, and will resent their parents at any hint of disapproval. But as soon as things go wrong, they bemoan that their parents fail to warn them of the danger and consequences of their actions.

But even warning may not be enough. Did "irrational exuberance" succeed in stopping them from continuing with excessive speculation? No. Did I ever hear any of these bastard say: "Greenspan should have controlled our greed, or punished us speculators by raising rates aggressively to stop the bubble from forming?

Of course not: "He's wonderful for keeping the economy and stock market going. The housing market is on fire", etc. But as soon as things begin to sour: "Didn't Greenspan see that it was a bubble? He didn't do anything to stop it to prevent our pain now. He created the mess."

I don't like the fact that Greenspan hasn't admitted that he was at least partially responsible for the recent crises. But to blame the guy for all these things is equally childish. Is the word "accountability" reserved only for Greenspan? He can say the same thing about these fans-who-become-critics predators: Not Me! Greenspan! The Fed! Other people's greed and speculation! The rest of the world! Not Me!

T said...

I'm no fan of Greenspan. His keeping fed funds rate at 1% for so long was no doubt partially contributed to what has been happening. But let's face it: was he solely responsible for all these things? Please. Don't be so naive. What about the misjudgment and greed of millions and millions of speculators and flippers around the world, including the Wall Street predators?

So the Fed is supposed to do all these things that Wall Street and other investors/speculators expect them to do to keep the economy humming along and everyone happy. Now they complain that the Fed was irresponsible for not acting like their parents to advice and/or prevent them from doing the wrong thing.

Where were all these people that criticized Greenspan when things were doing well before the stock bubble burst and before the housing bubble crashed ? Instead, he was the "greatest Fed chairman", the "Maestro" that saved us from crisis to crisis, the one who's responsible for all these great things that happened to the economy.

The Greenspan's put was just the catalyst, not the real cause of all these troubles that we're experiencing. The cause was the insatiable greed and herd mentality/predatory practices of Wall Street, and other stock investors/speculators and house flippers that took advantage of low rates and their victims' trust and gullibility.

Those speculators that currently whine about Greenspan and the Fed should wake up and look at themselves in the mirror. Had he tried to raise rates aggressively to stop the stock market bubble, or listened to Gramlich and started cracking down on predatory lending, these same people would have bemoaned: "he caused the economy and stock/housing markets to grind to a halt", or so to that effect.

As it's become obvious, Wall Street and the housing/mortgage predators, after praising Greenspan and the Fed for helping them prosper during good times, now are lamenting that he was the cause for their downfall, and expect the next Fed to come to their rescue. Stop behaving like dumb cry babies. These are the greedy parasites that want to privatize profits and socialize losses.

These predators are like misbehaved children who want their parents to give them freedom to do what they want, because they think they are responsible grown-ups and don't need supervision, and will resent their parents at any hint of disapproval. But as soon as things go wrong, they bemoan that their parents fail to warn them of the danger and consequences of their actions.

But even warning may not be enough. Did "irrational exuberance" succeed in stopping them from continuing with excessive speculation? No. Did I ever hear any of these bastard say: "Greenspan should have controlled our greed, or punished us speculators by raising rates aggressively to stop the bubble from forming?

Of course not: "He's wonderful for keeping the economy and stock market going. The housing market is on fire", etc. But as soon as things begin to sour: "Didn't Greenspan see that it was a bubble? He didn't do anything to stop it to prevent our pain now. He created the mess."

I don't like the fact that Greenspan hasn't admitted that he was at least partially responsible for the recent crises. But to blame the guy for all these things is equally childish. Is the word "accountability" reserved only for Greenspan? He can say the same thing about these fans-who-become-critics predators: Not Me! Greenspan! The Fed! Other people's greed and speculation! The rest of the world! Not Me!

thegreatone2121 said...

Thank you Mr t.

The sole observation that criticism of Alan Greenspan started only after the mortgage crisis has truly unfolded is perhaps indicative of a much wider truth.

The market needs someone to blame and suddenly berating Greenspan is fashionable. A continuation of the herd mentality perhaps?

Guambat Stew said...

Greenspan's Putzpa

"Least sophisticated borrowers" shagged, Fed shrugged