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When,
during the invasion of Iraq,
the United States Government issued its famous deck of playing cards with the
52 arch villains of the Iraqi police state, Saddam Hussein's face adorned the
Ace of Spades. If the Obama Administration wanted to engage in a similar
public relations campaign for the real estate crisis, the top card should be
reserved for Alan Greenspan.
Yet
in a speech this Tuesday before the National Association of Realtors, Sir
Alan “the-bubble-blower” claimed that his low interest rate
policies in the early and middle years of this decade had no effect on
mortgage rates or real estate prices. As a result, he claims no
responsibility for the subprime mortgage crisis. But even current Treasury
Secretary Timothy Geithner, who shared interest
rate policy responsibility as governor of the New York Fed during the
Greenspan regime, recently admitted that overly accommodative policy helped
inflate the bubble. So what does Greenspan know that everyone else doesn't?
His
primary defense is that mortgage rates were a
function of long-term interest rates which were simply not responding to the
movement in short term rates, which he did control. While it is true that the
flow of capital from foreign creditors with excess dollars did keep long
rates low despite rising short rates, this “conundrum” was not
the leading factor in the housing bubble. Although rates on thirty-year fixed
rate mortgages are based on long-term bonds, by 2005 such loans had become an
endangered species. The housing bubble was all about adjustable-rate
mortgages with 1-7 year teaser rates primarily based on the Fed funds rate.
The
rock bottom teaser rates, permitted by the 1% Fed funds rate, were the
primary reason that many home buyers were able to qualify for mortgages they
couldn't otherwise afford, and in turn, to bid up home prices to bubble
levels. By pushing down the cost of short-term money, the Fed enabled
homebuyers to make big bets on rising real estate prices. Without the Fed's
help, few borrowers would have “qualified” for these risky
mortgages and real estate prices never would have been bid up so high.
Greenspan
expresses exasperation now, as he did then, that his careful nudging of
interest rates higher by quarter point increments did not translate into
corresponding increases in long-term rates. Unfortunately, according to
Greenspan, the markets would not cooperate with his wise guidance, and to his
dismay, mortgage rates fell despite his best efforts. As they say in Texas, this dog will
just not hunt. If the “measured pace” of his quarter point hikes
were too slow to produce the desired effect, why didn't Greenspan jack up the
pressure? With interest rates far below the official inflation rate for many
years during the bubble, he certainly had plenty of room to maneuver. The claim that he was unhappy results of his
rate hikes, despite his having done nothing to adjust that policy, is
ridiculous.
In
addition to his colossal errors on interest rate policy there were many other
ways Greenspan blew air into the real estate bubble. One example was what the
market called the “Greenspan put.” By creating the perception in
word and deed (since proven accurate) that the Fed would backstop any major
market or economic declines, lenders became more comfortable making risky loans.
In an often quoted 2004 speech, Greenspan went so far as to actively
encourage the use of adjustable-rate mortgages and praised home equity
extractions for their role in contributing to economic growth. In fact,
rather than criticizing homeowners for treating their houses like ATM
machines, he often praised the innovative ways in which such homeowners were
“managing” their personal balance sheets. Greenspan was as much a
proponent of leverage for homeowners on Main Street as he was for bankers on
Wall Street.
The
bottom line is that Greenspan fathered the housing bubble and now he refuses
to acknowledge kinship of his wayward child. His denial of responsibility is
an act of stunning bravado, and is a testament to his ability to turn even
the simplest of situations into an impenetrable tangle of theories and
statistics. The private sector jokers who now hold top dishonors
in our pack of economic villains are easily trumped by the Maestro. The fact
that Greenspan still has any credibility shows just how little understanding
the general public, including Wall Street and the media, actually have about
this crisis.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in depth analysis of the
tenuous position of the American economy, the housing and mortgage markets,
and U.S. dollar denominated investments, read my new book : The Little Book of Bull Moves in Bear Markets" (Wiley, 2008).
More importantly take
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