Greenspan: The Maestro is Mad

Former Federal Reserve Chairman Alan Greenspan has become extremely concerned that his legacy is being tarnished by the loud chorus of critics who blame him for engineering the housing bubble. After being criticized by several economists for his March 17 op-ed piece in the Financial Times, Greenspan is back this morning, defending his actions in “The fed is blameless on the property bubble.”

Here are the Maestro’s key arguments of why the Fed under his leadership did not contribute to the housing bubble:

“The US bubble was close to median world experience and the evidence that monetary policy added to the bubble is statistically very fragile.” Greenspan’s attitude is that housing bubbles occurred worldwide. Forget the world takes its cues from US economic and monetary policies, and many of the world’s currencies are tied to the US dollar.

“The problem is not the lack of regulation but unrealistic expectations about what regulators are able to prevent.” Greenspan argues that stronger Fed regulation of lending products would not have prevented the subprime mortgage crisis. Indeed, Greenspan took the opposite view. In speeches and Congressional appearances, Greenspan outright encouraged lenders to engage in financial alchemy. In 2004, Greenspan said “American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage."* Despite low fixed mortgage rates, Greenspan kept touting the benefits of adjustable- rate mortgages.

By keeping interest rates too low for too long, Greenspan encouraged institutional and individual investors to go further out on the risk curve for yield. Every time Congress proposed to raise FDIC insurance on bank held deposits above $100,000, Greenspan vehemently objected.

“Even with full authority to intervene, it is not credible that regulators would have been able to prevent the subprime debacle.” The Bernanke Fed has a proposed rule to amend the home mortgage provisions of Regulation Z. If these proposals had been in place, the “subprime debacle” would not have occurred. Bernanke’s proposal requires borrowers to repay the loan from sources other than the home’s value, their income/assets must be verified, and banks would be prohibited from giving “yield-spread premiums” to mortgage brokers, amongst many other important rules. Greenspan constantly talked about the home as a vehicle of “wealth extraction” (your home as an ATM machine). As long as home prices kept rising, people could profit from real estate speculation as well as tap into the increased value of their residence for a home equity loans to buy cars, vacations, BigMacs, etc.

Greenspan’s tone toward the end of the piece suggests that he doesn’t believe his policies are being treated fairly against other economic views expressed by the FT’s Economists’ Forum.

Pluto in Capricorn is challenging Greenspan’s Mercury in Aries, indicating a deep questioning by other economic experts about the root causes of the credit collapse. The April 5 Aries New Moon is challenging Greenspan’s natal Mars in Capricorn. Greenspan feels he must fight to defend his reputation. Saturn in Virgo will oppose Greenspan’s Pisces Sun in late September, increasing the criticisms against his Fed tenure. These and other upcoming challenging transits show the need for Greenspan to take steps to relax. Instead of fighting his critics, Greenspan could be enjoying life with his wife (NBC News reporter Andrea Mitchell) and the freedom of retirement.

Related Posts: “Bubbles Beyond the Bathtub”, “Dumb and Dumber by the Day”, “Headwinds Hit Wall Street”.

Alan Greenspan: March 6, 1926 time unknown New York City.

* “Understanding Household Debt Obligations” : speech given by Greenspan at the Credit Union National Association 2004 Governmental Affairs Conference, February 23, 2004.

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