Greenspan: Fed Did Not Cause Housing Bubble

[August1991]

There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

...

As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

WSJ

Greenspan even lays the blame for "loose Fed" argument at the feet of John Taylor:

However, starting in mid-2007, history began to be rewritten, in large part by my good friend and former colleague, Stanford University Professor John Taylor, with whom I have rarely disagreed. Yet writing in these pages last month, Mr. Taylor unequivocally claimed that had the Federal Reserve from 2003-2005 kept short-term interest rates at the levels implied by his "Taylor Rule," "it would have prevented this housing boom and bust. "This notion has been cited and repeated so often that it has taken on the aura of conventional wisdom.

---

Someone in the future will figure out a way to determine what caused this bubble. Taylor makes a good case that it was the Fed's loose monetary policy, but Greenspan's point is well taken. I'm inclined to add that technical innovations in banking and finance had an effect too. Bubbles happen and trying to prevent them is harder than preventing a hurricane. Hurricanes have a common origin but each bubble has a different cause.

It is terribly naive to believe that regulation would change anything.

In any case, we now face the aftermath and the collapse of a bubble. A major consequence is that American (and foreign banks) have toxic assets, nominally insured by AIG, that have no valuation in a secondary market. Bankers typically believe that the assets are seriously undervalued and will be worth something once this panic subsides.

IOW, the bankers are like anyone who goes into bankruptcy for lack of liquidity. It's a frustrating experience. The assets are there but they don't have the cash. Ultimately, it's like the guy at the casino who is down a few thousand, out of money and wants to borrow a few bucks so he can win back his losses.

[Oleg Bach]

Nope it is not 1928 and blaming the classic Jew for economic troubles will not fly this time. The anglo elite got themselves a "good Jewish accountant" to cook the books...you don't blame those people for doing what you request..after all Greenspan was JUST FOLLOWING ORDERS. My how the world has changed and still remains the same - mabye a world war would be the best stimulus package imaginable? Then to divert the crimminality of it all - you could holocaust those nasty Muslims and maybe toss in the Jews while you are at it? Germanic anglos are a clever and cold bunch. BUT they can't pull it off this time - you need a new game plan and the Hitler approach will be noticed - To bad their bag of tricks is empty. Looks like the Americans and others are finally caught committing fraud. ha ha ....and the Federal Reserve? Attatching Federal to the title is also not going to work...federal would imply that it belonged to the nation - and we all know that the Fed is a private trust fund..That the average person contributes to but can never withdraw from ---- sort of reminds me of the Vatican. They have lost their line of credit and crediblity also.

[msj]

Ah yes, of course Greenspan isn't going to admit the role he played.

For those interested in another point of view:

Greenspan’s Denial

and also:

Greenspan: The Fed Didn't Do It

[August1991]

Ah yes, of course Greenspan isn't going to admit the role he played.

For those interested in another point of view:

Greenspan’s Denial

and also:

Greenspan: The Fed Didn't Do It

msj, I already read Ritholtz post so there's nothing new there. (For those who don't know, Barry Ritholtz is a stock analyst/promoter who sells books and has predicted a stock market collapse for the past five years or so. Given the recent collapse, this is his chance for his fifteen minutes, and I suspect that he'll lose all his winnings believing in his predictive skills.)

As to your second link, Mark Thoma (a leftist) says this:

I'm in agreement with Greenspan's response to Taylor to the extent that following the Taylor rule wouldn't have stopped the crisis, but I think the low interest rate policy pursued by the Fed is part of the story and served to magnify other factors.

No wonder. Taylor is "Republican", or something. (This partisanship in the US is tiresome. I'm reminded of Lilliput and Blefuscu.)

Edited March 12, 2009 by August1991

[msj]

msj, I already read Ritholtz post so there's nothing new there. (For those who don't know, Barry Ritholtz is a stock analyst/promoter who sells books and has predicted a stock market collapse for the past five years or so. Given the recent collapse, this is his chance for his fifteen minutes, and I suspect that he'll lose all his winnings believing in his predictive skills.)

As usual, August must resort to character assassination rather than deal with the substance of the post.

For those interested in reading Barry Ritholtz to find out what his views really are then go here.

I wouldn't trust August to give me a straight answer on what 2+2 equals so don't rely on him to give an honest appraisal of someone's character.

Oh, and one other thing - that post was NOT written by Barry.

It was written by a Peter Boockvar.

I will let you google him to do a similar character assassination rather than provide an actual rebuttal to his points.

And you wonder why I call you intellectually dishonest?

As to your second link, Mark Thoma (a leftist) says this:

Oh, now there's an arugment! The guy's a "leftist." Again, nice substance.

No wonder. Taylor is "Republican", or something. (This partisanship in the US is tiresome. I'm reminded of Lilliput and Blefuscu.)

Can you point out where that is stated in the article? Are you sure it is not in the comments?

I just want to see the context since you cannot be trusted per the above.

Edited March 12, 2009 by msj

[Shady]

that have no valuation in a secondary market. Bankers typically believe that the assets are seriously undervalued and will be worth something once this panic subsides.

A large part of the problem also stems from the "mark to market" accounting rule, which has contributed greatly to the undervalued assets. This has been weighing banks down, and it needn't be so. Hopefully this will be addressed soon, but apparently Obama wants to solve every other problem before finance, and all at the same time.

[sharkman]

I don't know, isn't it possible that the housing bubble was caused by both low interest rates and loose monetary policy? There was quite a synergy between the two if you ask me. But low rates alone wouldn't have caused it if the banking system would have been more careful on who they had given mortgages to.

[msj]

I don't know, isn't it possible that the housing bubble was caused by both low interest rates and loose monetary policy? There was quite a synergy between the two if you ask me. But low rates alone wouldn't have caused it if the banking system would have been more careful on who they had given mortgages to.

Bingo! We have a winner!

Yes, it would be nice if the banks could have regulated themselves to not lend money so foolishly.

Alas, they can't, which is why they need proper regulation in the first place (or, in this situation, after the fact).

[GostHacked]

I don't know, isn't it possible that the housing bubble was caused by both low interest rates and loose monetary policy? There was quite a synergy between the two if you ask me. But low rates alone wouldn't have caused it if the banking system would have been more careful on who they had given mortgages to.

I also blame the banks and homeowners. The homeowners for living beyond their means, and the banks allowing them to borrow more money than they could ever pay back. Stupidity all around.

One of the few times where Sharkman and I are on the same page.

[msj]

And another article to consider about Greenspan's "legacy:"

Greenspan Forgets Where He Put His Asset Bubble: Caroline Baum

I particularly like Fleckenstein's point about the Fed's asymmetrical bubble policy.

[i'm putting up an article by Baum and pointing out Fleckenstein just so August can give me the "goods" on them. Are they "left or are they "right?" Do they make lots of dough? Are they doomer gloomers? Enquiring minds want to know!!! ]

[Shady]

Yes, it would be nice if the banks could have regulated themselves to not lend money so foolishly.

It would have been even nicer if the Government didn't promote foolish lending, and in some cases, force it.

[msj]

It would have been even nicer if the Government didn't promote foolish lending, and in some cases, force it.

Sure, the government shouldn't be guaranteeing debt (of course, if they did that then AIG, Citi, and Bank of America would all be bankrupt by now and we would probably be eating out of tin cans while holding our shotguns [bC_2004 - that's a "royal" our]).

Of course, the government did not force banks to have such shoddy lending practices in the first place.

WaMu made loans based on virtually nothing (literally one piece of paper) and did little to no income verification - the government never forced them to do that. They did it on their own.

[Shady]

Sure, the government shouldn't be guaranteeing debt (of course, if they did that then AIG, Citi, and Bank of America would all be bankrupt by now and we would probably be eating out of tin cans while holding our shotguns [bC_2004 - that's a "royal" our]).

Of course, the government did not force banks to have such shoddy lending practices in the first place.

WaMu made loans based on virtually nothing (literally one piece of paper) and did little to no income verification - the government never forced them to do that. They did it on their own.

That simply isn't true. The Government was directly involved in pushing lowered lending practices, and even got in the business for themselves (Freddie Mac & Fannie Mae). It was all about so-called affordable housing. Didn't work out so well, did it?

[msj]

That simply isn't true. The Government was directly involved in pushing lowered lending practices, and even got in the business for themselves (Freddie Mac & Fannie Mae). It was all about so-called affordable housing. Didn't work out so well, did it?

We've been through this before in other threads and you have failed to provide any proof for this claim.

Read the CRA. It does not state anywhere that banks are forced to lend to poor credit risks. Banks did this on their own volition.

Fannie/Freddie have been around forever and now, all of a sudden, they're a problem?

Right.

If banks did what they are supposed to do - i.e. keep the mortgage receivables on their books and know their clients (which is to say, know their risk) then the banks wouldn't be failing.

[Shady]

Fannie/Freddie have been around forever and now, all of a sudden, they're a problem?

Right.

Yes, they were absolutely the problem, and it's kind of sad you don't know it. They lowered lending standards, and had a huge stake in the mortage industry.

A story from The New York Times, September 30, 1999.

Fannie Mae Eases Credit To Aid Mortgage Lending

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

The New York Times

Consider your bullshitting over.

[punked]

Yes, they were absolutely the problem, and it's kind of sad you don't know it. They lowered lending standards, and had a huge stake in the mortage industry.

A story from The New York Times, September 30, 1999.

Fannie Mae Eases Credit To Aid Mortgage Lending

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

The New York Times

Consider your bullshitting over.

And Bush saw how this was was driving up home values and adding captial to the American way of life. So he created a whole act for it. He called it the American Dream Downpayment Act. "A house for every American" was his dream. He touted and I quote:

".....The reason that is so is because there is renewed confidence in our economy. Low interest rates help. They have made owning a home more affordable, for those who refinance and for those who buy a home for the first time. Rising home values have added more than $2.5 trillion to the assets of the American family since the start of 2001.

The rate of homeownership in America now stands a record high of 68.4 percent. Yet there is room for improvement. The rate of homeownership amongst minorities is below 50 percent. And that's not right, and this country needs to do something about it. We need to -- (applause.) We need to close the minority homeownership gap in America so more citizens have the satisfaction and mobility that comes from owning your own home, from owning a piece of the future of America.

Last year I set a goal to add 5.5 million new minority homeowners in America by the end of the decade. That is an attainable goal; that is an essential goal. And we're making progress toward that goal. In the past 18 months, more than 1 million minority families have become homeowners. (Applause.) And there's more that we can do to achieve the goal. The law I sign today will help us build on this progress in a very practical way."

Don't let Republicans tell you it was dems forcing people to loan to minorities and the poor which caused this.

http://www.americandreamdownpaymentassista...hsp12162003.cfm

[Shady]

And Bush saw how this was was driving up home values and adding captial to the American way of life. So he created a whole act for it. He called it the American Dream Downpayment Act. "A house for every American" was his dream. He touted and I quote:

".....The reason that is so is because there is renewed confidence in our economy. Low interest rates help. They have made owning a home more affordable, for those who refinance and for those who buy a home for the first time. Rising home values have added more than $2.5 trillion to the assets of the American family since the start of 2001.

The rate of homeownership in America now stands a record high of 68.4 percent. Yet there is room for improvement. The rate of homeownership amongst minorities is below 50 percent. And that's not right, and this country needs to do something about it. We need to -- (applause.) We need to close the minority homeownership gap in America so more citizens have the satisfaction and mobility that comes from owning your own home, from owning a piece of the future of America.

Last year I set a goal to add 5.5 million new minority homeowners in America by the end of the decade. That is an attainable goal; that is an essential goal. And we're making progress toward that goal. In the past 18 months, more than 1 million minority families have become homeowners. (Applause.) And there's more that we can do to achieve the goal. The law I sign today will help us build on this progress in a very practical way."

Don't let Republicans tell you it was dems forcing people to loan to minorities and the poor which caused this.

http://www.americandreamdownpaymentassista...hsp12162003.cfm

If you bothered to do any reading, you'd have known that the act was to provide assistance with down payments on homes. Not the zero down, no income, no job loans of the Freddie, Fannie, and Democrat variety. Huge difference. Not to mention that 2003 is the same year Bush first tried to reform regulations of the mortgage industry. A problem that Democrats refused to even acknowledge existed.

"These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis"

"The more people exaggerate these problems, the less we will see in terms of affordable housing"-- Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee, September 2003.

[punked]

If you bothered to do any reading, you'd have known that the act was to provide assistance with down payments on homes. Not the zero down, no income, no job loans of the Freddie, Fannie, and Democrat variety. Huge difference. Not to mention that 2003 is the same year Bush first tried to reform regulations of the mortgage industry. A problem that Democrats refused to even acknowledge existed.

"These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis"

"The more people exaggerate these problems, the less we will see in terms of affordable housing"-- Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee, September 2003.

I seem to remember that. It was when the Republicans killed that bill to change all that in committee.

[msj]

Yes, they were absolutely the problem, and it's kind of sad you don't know it. They lowered lending standards, and had a huge stake in the mortage industry.

Consider your bullshitting over.

Don't get me wrong, Shady, I don't want to look a gift horse in the mouth and all that (normally I would jump all over this as further proof of why the industry needed proper regulation etc etc), it is just that I don't think the degree is what you think it is.

What about the charge that Fannie and Freddie "made" the market so that all these subprime loans could be securitized? There's a grain of truth in there, but I think keeping in mind which loans are going bad is useful, when reading this excerpt.

This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.

To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.

But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.

Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks -- not Fannie and Freddie -- dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data. [Emphasis added -- mdc]

Now, again, consider which subprime loans, in the graph below, went bad...

Link

Essentially, I agree with the conclusion of the above link:

I think all of this leads to a more nuanced view of the role of CRA and the two GSE's in the crisis. If I had to identify the central factors, I wouldn't point to F&F alone, or CRA alone (if at all). Rather, I'd look to (i) monetary policy (including whether it was lax, and the implications of the "Greenspan put"), (ii) what drove down the returns at the long end of the maturity spectrum ("the conundrum") thus inducing the desperate search for yield, (iii) securitization in the absence of countervailing regulation and (iv) the development of a completely non-transparent and unregulated over-the-counter credit default swap market.

[msj]

I largely agree with Jack MC Hugh's criticism of Greenspan's piece:

GE and Rising EBITDAWs boost stocks

Constant readers are probably already trying to click the delete key, since they know well my views about Mr. Greenspan. At the risk of picking too hard at the scab of repetition, let me offer a few observations of the Maestro’s defense of himself, er, the Fed. In preview, let me say that, in attempting to fire back at his critics, Mr. Greenspan actually shoots himself in the foot.

1) How could the term “Housing Bubble” be included in the title of your Op Ed, Mr. Greenspan? While in office you repeatedly stated that bubbles of all types were impossible to identify and that residential real estate in particular was unsuited to bubble-like investment behavior. That you now admit there was a housing bubble at all is an indictment of your previous claims.

2) Fixed rate mortgages were not the problem, sir. It was adjustable rate mortgages and their low teaser rates tied to the bottom-scraping funds rate that encouraged many to reach beyond their means for homes. ARM loans — the ones you advised folks to sign up for back in 2004 — are leading the way among mortgages that are currently either delinquent or in default.

3) The worst performing of these ARMs, Mr. Greenspan, have been Negative Amortization Option ARMS, a product that allows a mortgage holder to pick their own payment. This time-bomb-like option of deferring even principle payments came courtesy of the financial engineers on Wall Street. You publicly and repeatedly encouraged this form of creativity while in office. Similarly, your cheerful backing of CDOs and other structured products in support of the American Dream has also proved to be monumentally costly for all of us.

4) Your hidden shame, the nasty role in the housing bubble only a precious few have correctly fingered you for, was letting mortgage lending standards drop through the floor. As overseer of the banking system, the Fed has always had the power to regulate lending standards. It holds considerable sway with investment banks and even non-banks, too. Low Doc, No Doc, Liar’s loans — even fraud — were all allowed to take root, flourish, and push the value of homes ever higher on your watch. If someone could sign their name, they could buy a house. From 2003 until you left office, Mr. Greenspan, no American could either watch T.V. or pick up the daily mail without being assaulted for adds encouraging people to use and abuse these new mortgage products. You could have told the banks and others on Wall Street to cease and desist at any time. And yet you stood mute.

The interest rates you cite in your defense played only a bit part in this still-unfolding drama; the damage wrought by non existent lending standards have become the star of this horror show. Rather than make the hard choices while in office, you simply retired and handed to Mr. Bernanke both your keys and an impossible set of circumstances. The trail of tears you’ve left behind has brought both our banking system and the global economy to their knees. Thanks to you, bank CEOs now feel a need to trumpet their rising EBITDAWs. Shame on you, Mr. Greenspan, and shame to anyone who believes what you wrote in yesterday’s Wall Street Journal.

I disagree with the last paragraph a bit - Bernanke is smart enough that he should have known it was foolish to take the top job after Greenspan.

It's not fun cleaning up the former chief's "legacy."

[August1991]

Bingo! We have a winner!

Yes, it would be nice if the banks could have regulated themselves to not lend money so foolishly.

Alas, they can't, which is why they need proper regulation in the first place (or, in this situation, after the fact).

Loose monetary policy is Taylor's argument - an argument that he has made for about 15 years or so - ever since his proposal of a Taylor rule.

Read the CRA. It does not state anywhere that banks are forced to lend to poor credit risks. Banks did this on their own volition.

Fannie/Freddie have been around forever and now, all of a sudden, they're a problem?

Yes, they're a problem now.

This crisis has raised serious questions (as if they hadn't been raised theoretically before) about the way governments intervene and the impication for macroeconomic markets.

----

I suspect that the conclusion will be that some players pushed the envelope. We live in a world of rational agents and if the State offers guarantees, some agents will exploit this avenue for diversified/reduced risk.

[msj]

August, I find it funny how you harp on about Taylor even when I'm talking about regulations besides twisting the knobs. Follow along, please.

Secondly, I find it so convenient to offer up an opinion with so little to back it up. When you're not conducting character assassination you are making simply assertions with nothing to back it up.

At least Shady can provide a decent link and a decent argument for which I give him respect!

My argument has been laid out on this topic numerous times for all to see and until someone comes along with better information and a better argument we are just going to have to disagree if only to stop wasting my friggin' time on this repetitive BS.