Friday, September 21, 2007

Alan 'Froth' Greespan: "We Had a Bubble in Housing"

JIM LEHRER: But you don't feel any responsibility for keeping interest rates low?

JIM LEHRER: Because interest rates were down, it was easier to buy a house?


JIM LEHRER: And the market boomed.

ALAN GREENSPAN: And the market boomed.

JIM LEHRER: It boomed too much?

ALAN GREENSPAN: Well, yes, I think it did boom too much.

ALAN GREENSPAN: Well, let me tell you. We had no choice. I mean, we're the vaunted Federal Reserve, but this global force was suppressing us. We actually tried in 2004 to get mortgage interest rates up and to put some sort of clamp on the extent of the housing boom, and we failed, because usually when we move short-term interest rates up, which is what the Federal Reserve does, long-term rates go with it. It didn't this time. We tried the same thing in 2005...

JIM LEHRER: Didn't happen?

ALAN GREENSPAN: Didn't happen. Had we done it back in 2002, there's no doubt in my mind nothing would have happened. And as a consequence, we and, in fact, every other central bank could not confront this issue.

And what I'm increasingly beginning to conclude is, when you get bubbles like this, there is no way of diffusing them until the speculative fever breaks on its own. We tried numbers of things, and other people tried numbers of things.


  1. Is AG's reputation-salvaging mission working?
    -- sglover

  2. From Reuters via MSN Money:

    House prices to drop much lower: Greenspan

    VIENNA (Reuters) - A big overhang of property will bring U.S. house prices down further, but it is too early to say if the economy will plunge into recession, former Federal Reserve chief Alan Greenspan was quoted as saying on Friday.

    Greenspan said in an interview with Austrian magazine Format that low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.

    "It's a difficult situation, there is an enormous overhang on the real estate market," Greenspan was quoted as saying. "Many buildings which just have been finished can't be sold ..."

    "So far, prices have dropped only slightly. But it was enough to cause alarm around the world," he said. "Prices are going to fall much lower yet."

    "However, it is too early to answer the question about a recession. We simply don't know yet. It depends on how flexibly the economy can react," he said.

    Greenspan said deregulation and the introduction of market economies in the former Communist bloc after the Berlin Wall fell in 1989 had caused a global boom and a worldwide reduction of interest rates, which both helped fuel the property bubble.

    "There is no doubt about the fact that low interest rates for long-term government bonds have caused the real estate bubble in the United States," he said.

    "The Federal Reserve began a series of interest rate increases in 2004. We were hoping to bring the speculative excesses in the real estate sector under control. We failed. We tried it again in 2005. Failure," he said.

    "Nobody could do anything about it, neither us nor the European Central Bank. We were powerless," he said.

  3. Funny, didn't Greenspan claim back in the day that he couldn't tell if there was a housing bubble because "you can't see a bubble until after its popped"?

    Looks like he is changing his tune after the fact.

  4. He had no choice? He's saying that the Fed HAD to lower short term rates to a rate lower than inflation, and then he acts surprised that speculation resulted. Alan also doesn't mention that having short term rates at 1% for so long is what enabled subprime ARMs to result in cheap teaser-rate monthly payments. Although he says that the Fed tried to get rates up in 2004 to put a "clamp" on the boom, wasn't it also in 2004 that he encouraged buyers to use ARMs? Roll the tape.

  5. Well, at least he could have put the clamps on the liar loans, teaser rates, etc. He could have warned the derivative investors about the high risk of their purchases.

  6. I'd like to see somebody ask him, point blank: "You admit that rates were unnaturally low, leading to the obvious conclusion that they would correct. But you used your soapbox to tell people that subprime I/O loans were good for them, and you encouraged them to take those loans. How do you reconcile this?"

    Of course, I'm sure his answer will be in the form of "it's not my fault! It's not my fault!!!!"

  7. It's amazing how BHs can read anything they want to into what people say. Re-read Greenspan's statement ... and quit reading into it. At the highest, simplest level he is simply saying the world economy has been booming due to the global economy that has resulted from the fall of communism and the joining of all peoples into one pan-global economy. And while the Fed and the ECB would have liked to have seen this boom be more controlled, it was so powerful and pan-global in nature that no one central bank (or two acting together) could temper its power. So yes, there'll be some backlash for some (i.e., read: those who didn't buy "back then") but the bottom line is that overall the world's people are far better off now than they were prior to this boom.

  8. The fascinating question for me is how Greenspan, who started out as a Randian gold bug, turned into a Paul Samuelson. I'll admit that I will borrow his book from the library.

    The question I would love to have someone ask Greenspan is "why did all the liquidity that was pumped into the market end in up being wasted in speculation?" It's as if the country, when handed a bag of money, went on a six-year coke binge.

  9. Yes, Lance, that is what Greenspan was specifically saying: The bubble that is bursting will hurt people who have no money invested in it.

  10. What a crock. You know how I know he's lying? Because they are still trying to re-inflate the housing bubble. Everyone the congress, the fed, the fcbs.