March 11, 2009

Alan Greenspan: The Fed didn't cause the housing bubble

Posted: 10:57 AM ET

By Alan Greenspan, former chairman of the Federal Reserve/Wall Street Journal

We are in the midst of a global crisis that will unquestionably rank as the most virulent since the 1930s. It will eventually subside and pass into history. But how the interacting and reinforcing causes and effects of this severe contraction are interpreted will shape the reconfiguration of our currently disabled global financial system.greenspan

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.

This should not come as a surprise. After all, the prices of long-lived assets have always been determined by discounting the flow of income (or imputed services) by interest rates of the same maturities as the life of the asset. No one, to my knowledge, employs overnight interest rates - such as the fed-funds rate - to determine the capitalization rate of real estate, whether it be an office building or a single-family residence.

READ MORE of Greenspan's commentary HERE

Filed under: Alan Greenspan • Economy

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hugh ~ california   March 11th, 2009 2:31 pm ET

Greenspan sounds once again like the handpicked Fed. chairman that Ronald Reagan appointed and offers only excuses, as he and Bush pushed more deregulation policies that offered no oversight. He refuses to accept any blame for our economic collapse; instead, he blames the global economy for everything.

Greenspan feels, "The solutions for the financial-market failures revealed by the crisis are higher capital requirements and a wider prosecution of fraud - not increased micromanagement by government entities." Excuse me Mr. Greenspan, how does the federal government prosecute fraud without increased micromanage-ment? Your approach deals with fraud after it happens, but does nothing in the way of prevention.

Greenspan's answer is, "Any new regulations should improve the ability of financial institutions to effectively direct a nation's savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive." Sounds familiar doesn't it. What is obviously wrong here is that it is counterproductive is to just sit back and watch it happen! Greenspan's approach is typical republican Reaganomics, small government and deregulation with no oversight to prevent fraud before it happens. Greenspan offers no new ideas to prevent further problems of fraud and wallstreet greed. His failed ideology contributed to the wallstreet collapse in the first place. It's not surprising that he accepts no blame for the worst recession since the Great Depression.

He and former president Bush allowed a greedy, incompetent housing market to inflate home prices through the roof that most working Americans can now not afford to own. That is where billions of wallstreet dollars went, and now the foreclosure epidemic is where may of those billions were lost. The global economy has contributed to the problem, but the deregulation policies in our country is the biggest cause of our economic collapse.

Michael C. McHugh   March 11th, 2009 3:11 pm ET

To me, the whole housing bubble was just part of the Second Gilded Age, along with the credit bubble, the ENRON bubble, the S& L bubble, the trade bubble, the NASDAQ bubble, Bernard Madoff blowing bubbles in all directions. It was a Gold Rush Era of free market capitalism–a free-for-all of uncontrolled greed and corruption. Greenspan played his part in this, and more than a symbolic part, for he was always a free marketeer going back to the days of Barry Goldwater.

But it's all over now, as the song said.

Mike, Zephyrhills, FL   March 11th, 2009 4:42 pm ET

Greenspan, humbug!!

He works for a shorter , company who makes millions off buying and selling short.

Trickle Down King!! Wake up america! Since 1983 and Reagan , we have been going downhill since, until the total accumulation of fake paper and hidden scams has come full circle!!

Dont think for a minute people arent waiting to cash in on this with our tax money and buy them and sell them off agian without paying one penny in capital gains or income taxes. Money will be in offshore accounts.

Problems will start next year, when unemployment benefits start drying up and 90 million baby boomers drawing SS and Medicare!
Our problems havent even started. You can not have part time jobs paying min wage and no benefits sustain this country.

We have no base anymore to sustain a middleclass, what you think medical and high tech going to save us, just who is going to be paying in this money to full fill all the requirements??

by 2011/12 you ll see 25% unemployed and 100 million americans out of work . Unless govt takes over entire healthcare, energy and insurance systemsand banks!! Otherwords our great Financial Services Economy, never has worked or will!

Mike, Zephyrhills, FL   March 11th, 2009 4:48 pm ET

Credit works like this, no job, bad credit, get a job, now you cant get credit!! A circle jerk!!

So with americans having more bad credit monthly and lasting 7-10 yrs on your report, I expect banks wont be lending and americans buying cars or homes anytime soon or in future.

90 million baby boomers wont be buy ing a home or car, they have them and will fix them up vs buying a new one.

So buy companies who sell Auto Parts and Home Depot, Lowes etc...and Walmart and any company that sells anything cheap.

Demographics my friends!!

Joe G. (Illinois)   March 11th, 2009 5:08 pm ET

What would have being by all them Abortionist and Liberal Progressives by now if it had if it had not being for that “Minor” Economic Inconvenience most people refer to as the Housing Bubble? Now… Anybody want to ask who caused it? Borak Obama says it was George W. Bush.. Borak Obama is upset about it! With all the high dreams and hopes he had.. He’s now stuck with a slumping economy and almost a bit frustrated about it.. Uh..! So Fantasy Hero's don't work that well in the real world. Thank you and Good day.

Charles W. Brown, Ph.D.   March 11th, 2009 5:35 pm ET

That is a half truth. The lack of government regulations gave the opportunity for millionaires and billionaires to relentlessly persue the growth of their wealth by means of greed and corruption. It was the government that put all their faith in the hands of greedy corporate leaders, and they took the opportunity as far as they could go. Government regulation is NOT socialism as the NeoCons believe.

hugh ~ california   March 11th, 2009 5:36 pm ET

@Joe G. (Illinois),
The presidents name is Barack Obama, not Borak Obama. Do you want our president to fail, like Rush Limbaugh does?

Kelli from Tampa   March 11th, 2009 6:09 pm ET

Go hugh Go!

Dodie from CA   March 11th, 2009 8:44 pm ET

Alan Greenspan was a major contributor to this current crisis. He was responsible for the deregulation of wall street.

What comes to mind is: How can anyone believe that leaving wall street alone to their own discretion and not regulating the trillions of dollars that pass through this entity would be beneficial. This just baffles my mind.

Personally, Alan Greenspan has nothing to offer me after that HUGE boo boo!

Dodie from CA   March 11th, 2009 8:48 pm ET

Go Mike, Zephyrhills, FL Go!!! You've got that!

Greenspan, humbug!! Now that is an honest opinion and good judgment of this guy

Helga Bischof   March 11th, 2009 10:24 pm ET

It seems Americans you do not know that most of the "bad" mortgages have been sold to European banks as "secure investment"!!
This way the American institutions and banks could provide mortgages for everybody want to be house owner – because they had no risk at all!
European Banks are broke as well – because of this!

Ramesh Sethi   March 11th, 2009 10:41 pm ET

Fed is sole responsible for this financial and housing foreclosure mess in USA because it had no proper regulations and checks over the Banks/FIs. Further the Banks/FIs not having proper regulations and control for financing the homes. The CEOs made such short term policies and made billions for themselves by selling the finance to non-deserving borrowers that created a bubble over a period. In many countries including Canada, China and India where banking regulations are stringent, this problem is much less or negligible except for the damage that many countries had to suffer on account of integration of large USA banks with the banks in other countries.

T   March 15th, 2009 5:44 pm ET

Can you help us. Please help make the world aware.

Start at the bottom and work up.

What is the Bottom-OIL!

Get Gas Prices to $1.00- $1.25 and asure the world you will do what it takes to keep it their for 2 years.

That will lower all cost world wide and people will start buying goods.

This means we need to Fix OPEC.

Please email me if you need more back up info.

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