This link is an interesting observation on Greenspan's continuing defense of his role in the "Crisis." In my comment, I made a reference to Greenspan's bragging in his book "The Age of Turbulence" that he purposely avoided questions in mandated testimony by giving incomprehensible answers. Apparently I've been the only one bothered by that. What would happen if the average person answered a Congressional committee with gibberish?
The Mess That Greenspan Made: Maestro no more
No question back in his heyday Greenspan was noted for talking gibberish, but times were good and he walked on water. I think Greenspan owns some of the blame for the economic meltdown, but not all of it. Yes, interest rates were too low for a prolonged period of time causing housing prices to rise dramatically higher than inflation wetting the appetite for speculation. In addition, I would add the failure to regulate derivatives under the Clinton Administration or create a trading market (see the Frontline episode on this (yes, Greenspan played a key part in that decision)), the social engineering of the housing market by Congress through Fannie and Freddie and the Community Reinvestment Act, poor lending practices by the banks and loan originators, and a total breakdown of SEC regulation and corporate risk management at some of our major financial institutions.... a perfect storm of events. Greenspan has been punished by the Gods of finance for his hubris, his reputation forever tarnished. But don't expect those who come after him to be anymore forthcoming.
ReplyDeleteI hesitate to offer this as a partial rebuttal because I'm afraid some politician will wander to the site and light bulbs will start to go off. I guess I'll take the chance.
ReplyDeleteI believe, and John Taylor of "The Taylor Rule" supports this with a counterfactual econometric study, that much of what we saw would have never happened if the Fed had stopped at 3% in 2003 rather than take rates down to 1%.
They went to 3% because they saw the U.S. going down the same road as Japan of the 1990s and therefore saw the need to take aggressive action.
The problem was they were playing with the most important price in the economy - the price of short term money.
Consider this (if there are any politicians hovering about please close this post!): suppose we have a negative economic outlook. One idea is to lower the price of gasoline. Suppose we lower it to $1/gallon. Obviously the economy will pick up, inflation will drop and yes, someone in the media will hail us as a Maestro.
Then, down the road (no pun intended), some nasty things will happen. Mileage driven will rise significantly, pollution measures will go beserk, politicians will lower the driving age, roads will become even more congested. And yes, loans to marginal borrowers will increase so everyone can buy a car.
But there are laws in economics. The one thing no one wanted to happen because (gasp!) it would cause the growth in GDP to tick down a bit, gasoline prices would rise.
The question is: who is to blame for the mess. Is it the lenders who made loans to marginal car borrowers? Perhaps it is the borrowers themselves! Didn't they know they couldn't afford those cars in a world of $3 gas? If there were securities constructed from the now bad loans perhaps the securities dealers are to blame.
The bottom line, in my view, is that we would have had nothing like what we experienced if rates hadn't been driven so low. Would we have had a downturn in housing? Sure. Would housing prices have dropped? Perhaps a minimal amount. Would there have been massive bank failures? No way.
One point of view.