Alan Greenspan owes America an apology
The former Fed chair is promoting his new
book. He should admit his role in the housing crisis, not insult our
intelligence
Dean Baker
theguardian.com, Monday 28 October 2013
10.30 EDT
Alan Greenspan will go down in history as the person
most responsible for the enormous economic damage caused by the housing bubble
and the subsequent collapse of the market. The United States is still down almost
9m jobs from its trend path. We are losing close to $1tn a year in potential
output, with cumulative losses to date approaching $5tn.
These numbers correspond to millions of
dreams ruined. Families who struggled to save enough to buy a home lost it when
house prices plunged or they lost their jobs. Many older workers lose their job
with little hope of ever finding another one, even though they are ill-prepared
for retirement; young people getting out of school are facing the worst job
market since the Great Depression, while buried in student loan debt.
The horror story could have easily been
prevented had there been intelligent life at the Federal Reserve Board in the
years when the housing bubble was growing to ever more dangerous proportions
(2002-2006). But the Fed did nothing to curb the bubble. Arguably, it even
acted to foster its growth with Greenspan cheering the development of exotic
mortgages and completely ignoring its regulatory responsibilities.
Most people who had this incredible infamy
attached to their name would have the decency to find a large rock to hide
behind; but not Alan Greenspan. He apparently believes that he has not punished
us enough. Greenspan has a new book which he is now hawking on radio and
television shows everywhere.
The book, which I have not read, is
ostensibly Greenspan's wisdom about the economy and economics. But he also
tells us that his problem as Fed chair was that he just didn't know about the
flood of junk mortgages that was fueling the unprecedented rise in house prices
during the bubble years. He has used this ignorance to explain his lack of
action – or even concern – about the risks posed by the bubble.
Greenspan's "I didn't know"
excuse is so absurd as to be painful. The explosion of exotic mortgages in the
bubble years was hardly a secret. It was frequently talked about in the media
and showed up in a wide variety of data sources, including those produced by
the Fed. In fact, there were widespread jokes at the time about "liar
loans" or "Ninja loans". The latter being an acronym for the
phrase, "no income, no job, no assets".
The fact that banks were issuing
fraudulent mortgages by the millions, and that the Wall Street crew was
securitizing them as fast as they could get them, was not top secret
information available only to those with special security clearance. This was
the economy in the years 2002-2006.
It was impossible to look at the economy
in these years and not see the role of the housing bubble and the tsunami of
bad mortgages that fueled it. The run-up in house prices led to a near record
pace of construction. Typically housing construction is around 4.5% of GDP. It
peaked at 6.5% in 2005. Greenspan didn't notice? Who did he think was going to
live in all these units, the building of which had created record vacancy rates
as early as 2003?
And he didn't notice that the spike in
house prices had led to a surge in consumption pushing saving rates to nearly
zero? He actually co-authored several pieces on exactly this topic with another
Fed economist. Between the 100% predictable collapse of residential
construction and the plunge in consumption that would follow the loss of the
housing wealth that was driving it, we were looking at a loss of more than $1tn
in annual demand. What did Greenspan think would fill this gap, purchases of
Ayn Rand's books?
Greenspan had all the information that he
could have possibly needed to spot the housing bubble and to know its collapse
would be really bad news for the economy. More than anyone else in the country
he was in a position to stop the growth of the bubble.
Suppose that, instead of extolling the
wonders of adjustable rate mortgages, Greenspan used his public addresses to
warn people that they were buying into an overpriced housing market; and he
warned investors that the subprime mortgage backed securities they were buying
were filled with fraudulent mortgages. Suppose further that he used the Fed's
research staff to document these facts.
Greenspan could have used the regulatory
powers of the Fed to crack down on the bad mortgages being issued by the banks
under the Fed's jurisdiction, as his fellow governor Edward Gramlich urged.
And, he could have arranged to have a meeting with other federal and state
regulators to see what they were doing to prevent mortgage fraud in the
financial institutions under their jurisdictions as well.
Those are the actions that we had a right
to expect from a Fed chair faced with the growth of a dangerous asset bubble.
That is what Alan Greenspan would have done if he had been earning his salary.
Instead, he did nothing. He cheered on the bubble until it burst and then he
said it wasn't his fault.
This man has nothing to tell the country
about the economy and the media is not doing its job to imply otherwise. If
Greenspan doesn't have the decency to keep himself out of public view after all
the damage he has done to the country, then the media should do it for him. The
only thing he has to say that would be newsworthy is that he's sorry.
Alan Greenspan
Alan Greenspan
was the chairman for the Federal Reserve System,
and is a member of the Council on Foreign
Relations (think tank).
Note: Paul
A. Volcker is a member of the Council on Foreign
Relations (think tank), was the chairman for the Federal Reserve System, and a lifetime trustee at the Aspen Institute (think tank).
Foundation
to Promote Open Society was a funder for the Aspen
Institute (think tank), and the Committee for Economic
Development.
George Soros
is the chairman for the Foundation to Promote Open
Society, and a member of the Council on Foreign
Relations (think tank).
John E.
Sexton is a member of the Council on Foreign
Relations (think tank), a trustee at the Committee for Economic
Development, and was the chair Council of Chairs for the Federal Reserve System.
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