Posted by Jonathan J. Miller -Thursday, March 8, 2012, 10:54 AM
An article in one of my favorite publications, The Atlantic, uses econo-wonk-speak to mischaracterize Alan Greenspan’s key role in goosing the housing bubble: Happy Birthday, Alan Greenspan: The Housing Bubble Wasn’t Your Fault.
He was certainly part of the problem and I thought history would not be kind to his legacy of running a Fed that led us to two historic bubbles in stocks and real estate. The points being raised are akin to staring at the hood ornament of your 1991 Buick Roadmaster Estate Wagon while driving – and why so many economists and political types missed the eventual housing fail. They didn’t look ahead to the on-the-ground behavior of everyone connected to the housing process.
The piece begins with debunking the conventional wisdom that low mortgage rates were the problem and suggests that monetary policy was not loose. Perhaps the title of the piece has little to do with the point the author is trying to make. However it’s like NAR Research press releases whose titles scream statements that have little to do with the body of text that follows – it becomes worthy of pointed criticism.
While it’s undeniable that rock-bottom mortgage rates — at least rock-bottom for the pre-2009 world — helped fuel the subprime frenzy, it’s not true that these low rates meant monetary policy was excessively loose.
The Federal Reserve as an institution did not understand the housing run up as it was happening or when it began to crack. Think “contagion.“
So while we can argue that “tight policy” and low rates don’t mean monetary policy was “easy” all day long, that’s some sort of top level wonkiness that does not excuse Greenspan’s role. The author misses the progression of events interlaced with Greenspan’s presence which goes something like this:
- Gramm-Leach-Bliley set the stage for bringing Wall Street into mortgage business.
- Greenspan maintained a hands off policy on regulatory oversight claiming the markets would self-regulate (later admitted this was wrong).
- After 9/11, the Fed pressed rates to the floor and held them there for more than 3 years.
- Housing prices ramped up in response to low rates.
- Wall Street was hungry for mortgages to repackage and sell.
- Prices rose rapidly and affordability fell creating a volume problem for lenders – so in order to keep the mortgage pipeline full, underwriting standards evaporated.
- Greenspan continue to ignore the unprecedented housing price run up nationally and the reckless risk management of commercial banks.
- The housing bubble burst roughly two years later as affordability could not be goosed any more by absence of bank lending standards (which Fed has some responsibility for oversight).
- Volume of sales and housing prices crashed.
- Greenspan eventually admitted he had made a policy error.
So perhaps he didn’t maintain a loose monetary policy as the author insists, but that has little to do with whether Greenspan was part of the problem that created the housing boom and bust. The man acknowledged he was and yes, he clearly was.