Alan Greenspan just published an article in the Wall Street Journal essentially saying "don't blame me for the housing bubble". Essentially he's taking the position that "I thought I was wrong once, but I was mistaken". Oh, and Milton Friedman was a friend of mine...
Other financial commentators had different ideas...
Another Diary on this subject here
in his Wall Street Journal Piece Alan Greenspan essentially says "Sure, there was a housing bubble, but the Fed had nothing to do with it"
...the... 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.
but Daily Finance disagrees
It is a silly line of reasoning. Low interest rates help drive up the purchase of everything from video games to clothing to cars. Whether an asset holds value for years or weeks, inexpensive access to capital makes the consumer giddy and helps fuel inappropriate financial behavior.
Greenspan may mount a spirited defense of his legacy, but a lot of experts won't
But anyway, Greenspan says, it's just global fluctuations that we can't control, even though (as the current crisis exhibits) we are the largest economy in the world...
Global market competition and integration in goods, services and finance have brought unprecedented gains in material well being. But the growth path of highly competitive markets is cyclical.
Over at iStockAnaylst though:
When debtors realize that the Fed will not deliver any real pain, they quickly pile on the debt, leading to the overleveraged condition we are experiencing now.
First, small differences in correlation coefficients are not adequate to test a hypothesis. Second, the low Fed funds rate touched off a flurry of adjustable-rate home loans, which Greenspan himself inadvisably endorsed at one point. The adjustable rate loans became a much larger part of the residential mortgage space than ever before.
As I think we've seen over that last few months, it's not a simple problem, but I would diagram it this way:
lax regulation + low interest -> housing bubble -> speculation (MBS- mortgage backed securities) -> misrepresented insurance (AIG, CDS) -> house of cards.
The way I read it, a housing bubble (overvalued), even if inadvisable, was survivable, but add on top of that unregulated derivatives based on overinflated values + Credit Default Swaps by institutions with no skin in the game = Ponzi Scheme. It could have been stopped at any point, with some regulation or some ethics or some fear for failure. But none of those happened.
Finally, it's pointed out the we aren't in a vacuum anymore, financially:
As (iStockAnalyst) noted at RealMoney during 2004-2006, the yield curve flattened the hard way, with the Fed raising rates, and the long end falling. I noted that China was acting as a second central bank for the US, stimulating as the Fed withdrew stimulus. But the Fed did little to counteract China’s influence; they could have been more aggressive, and acted faster. They could have tightened margin requirements or bank capital requirements. They just plodded, and continued to let overall leverage in the economy get out of whack.
Greenspan says :
However, the appropriate policy response is not to bridle financial intermediation with heavy regulation.
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.
But in my opinion he is cleverly "hedging his bets", as we say, by referring to "heavy regulation" and "increased micromanagement". These are code words. There is a spectrum from no regulation to too much regulation, but what we needed was 'Sufficient Regulation", and as Greenspan himself has admitted, he was blindsided by the greed and opportunistic tendencies of the financial markets.
Prosecution of Fraud?
If you remove regulation, there's no fraud - what was done was perfectly legal!
In other words, as someone else has commented, "the invisible hand of the free market just bitchslapped us"
And as for Milton Friedman (from Greenspan's article):
I personally prefer Milton Friedman's performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: "There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind.
Well, isn't that special! My BFF and his theories just crashed the world economy, but hey, he has a Nobel.
I'm not an economist, but I've learned a lot about this whole situation from Dkos and the helpful comments people with more insight make - so I'll be interested in comments about this whole issue, and I wrote about this because even I can read the WSJ article and find questionable logic in this Mea Culpa from Greenspan.
Only good thing about the article : no mention of Ayn Rand