There is an
interesting three part series in the Washington Post on the U.S. Housing
Bust. Part one is called "The Credit Crisis".
Of course this blog has been talking about the credit crisis for years, while
most of the mainstream press was in absolute denial. Greenspan, Bernanke, and
the Treasury department were also (and still are) in denial as well.
Let's start with a chart by the Washington Post showing a timeline of the
Myth Of The Savings Glut
The above chat perpetuates the myth proposed by Bernanke that some sort of
"savings glut" was responsible for the housing boom. This is of
course complete nonsense. It is impossible to have "too much
savings". Furthermore, much of that proposed "savings" is in
reality Chinese printing presses running like mad, selling Yuan (Renmimbi) to
buy dollars. This suppressed the value of the Yuan, kept Chinese exports
flowing and allowed China to maintain its currency peg. These policies are
also causing the Chinese economy to overheat, and a significant factor behind
the rise in commodity prices.
For more on these ideas, please see Bernanke
Blames Saving Glut For Housing Bubble.
Article Excerpts Point To Damning Indictment Of The Fed
Attitudes and policies by the Fed and the treasury department are what fueled
this boom, no matter what Greenspan and Bernanke say to contrary. There are
some damning quotes from the article and those are what I will focus on.
May 19, 2000
Treasury undersecretary Gary Gensler says subprime loans are "a good
option when the alternative is no access to credit".
This has been proven wrong in spades.
Part 1 Boom Excerpts
The government's efforts to counter the pain of [terrorist attacks and the
dotcom] bust pumped air into the next bubble: housing. The Bush
administration pushed two big tax cuts, and the Federal Reserve, led by Alan
Greenspan, slashed interest rates to spur lending and spending.
Low rates kicked the housing market into high gear. Construction of new homes
jumped 6 percent in 2002, and prices climbed. By that November, Greenspan
noted the trend, telling a private meeting of Fed officials that "our
extraordinary housing boom . . . financed by very large increases in mortgage
debt, cannot continue indefinitely into the future," according to a
The Fed nonetheless kept to its goal of encouraging lending and in June 2003
slashed its key rate to its lowest level ever -- 1 percent -- and let it sit
there for a year. "Lower interest rates will stimulate demand for
anything you want to borrow -- housing included," said Fed scholar John
Taylor, an economics professor at Stanford University.
The average rate on a 30-year-fixed mortgage fell to 5.8 percent in 2003, the
lowest since at least the 1960s. Greenspan boasted to Congress that "the
Federal Reserve's commitment to foster sustainable growth" was helping
to fuel the economy, and he noted that homeownership was growing.
There was something very new about this particular housing boom. Much of it
was driven by loans made to a new category of borrowers -- those with little
savings, modest income or checkered credit histories. Such people did not
qualify for the best interest rates; the riskiest of these borrowers were
known as "subprime." With interest rates falling nationwide, most
subprime loans gave borrowers a low "teaser" rate for the first two
or three years, with the monthly payments ballooning after that.
Government-chartered mortgage companies Fannie Mae and Freddie Mac,
encouraged by the Bush administration to expand homeownership, also bought
more pools of subprime loans.
One member of the Fed watched the developments with increasing trepidation:
Edward Gramlich, a former University of Michigan economist who had been
nominated to the central bank by President Bill Clinton. Gramlich would later
call subprime lending "a great national experiment" in expanding
In 2003, Gramlich invited a Chicago housing advocate for a private lunch in
his Washington office. Bruce Gottschall, a 30-year industry veteran, took the
opportunity to pull out a map of Chicago, showing the Fed governor which
communities had been exposed to large numbers of subprime loans. Homes were
going into foreclosure. Gottschall said the Fed governor already "seemed
to know some of the underlying problems."
Jan. 31, 2006.
Greenspan, widely celebrated for steering the economy through multiple shocks
for more than 18 years, steps down from his post as Fed chairman.
Greenspan puzzled over one piece of data a Fed employee showed him in his
final weeks. A trade publication reported that subprime mortgages had
ballooned to 20 percent of all loans, triple the level of a few years
"I looked at the numbers . . . and said, 'Where did they get these
numbers from?' "
Greenspan said he did not recall whether he mentioned the dramatic growth in
subprime loans to his successor, Ben S. Bernanke.
Bernanke, a reserved Princeton University economist unaccustomed to the
national spotlight, came in to the job wanting to reduce the role of the Fed
chairman as an outsized personality the way Greenspan had been. Two weeks
into the job, Bernanke testified before Congress that it was a
"positive" that the nation's homeownership rate had reached nearly
70 percent, in part because of subprime loans.
looked at the [subprime] numbers . . . and said, 'Where did they get these
numbers from?' "
Bernanke: Two weeks into the job, Bernanke testified before
Congress that it was a "positive" that the nation's homeownership
rate had reached nearly 70 percent, in part because of subprime loans.
Since then Bernanke has reversed course and is now blaming the "savings
glut" for the housing bubble. Greenspan, in interviews is blaming the
fall of the Berlin Wall while backtracking on his endorsement of ARMs and
Neither is willing to say what is obvious to the entire rest of the world:
The Fed, in a foolish attempt to bail out its banking buddies from bad dotcom
and foreign loans, took a mildly bad situation and made an international
disaster out of it.
Indeed, Fed actions in 2001-2004 have brought about the very deflationistic
conditions they sought to prevent. Now, in accordance with the Fed
Uncertainty Principle, the Fed is seeking additional
powers instead of being disbanded entirely.