The mighty Greenspan starts taking some hits

(and not just from this corner...)

from JoeUser Forums

So the once mighty Alan Greenspan is apparently taking some hits and being seen as potentially having caused the current mess in the housing markets and economy.  Gee, others apparently can take notice!

Read the news here (from The Washington Post, via MSNBC): ‘Maestro’ Greenspan stands his ground Ex-chairman says Fed policies didn’t cause current woes

Perhaps the Maestro composed some discordant notes after all.

The record of longtime Federal Reserve chairman Alan Greenspan -- worshipped by business leaders and dubbed "Maestro" in a 2000 biography by The Post's Bob Woodward -- is getting a critical look as his successor Ben S. Bernanke wrestles with problems that began on the Maestro's watch.

Many economists blame Greenspan for lax bank supervision and for keeping interest rates too low, too long from mid-2003 to mid-2004. That, the theory goes, fueled the housing bubble and spawned subprime and adjustable-rate mortgages for low-income people, vast numbers of whom can't make their payments now. Banks bought those mortgages in bundles that are worth far less than they originally were. That has led to big write-offs, shaking the entire financial system.

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[more]

There's an even better quote accompanying a picture of Mr. Greenspan, that would be the following:

Greenspan testifies

"I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk," Alan Greenspan wrote in his memoir. But the former Fed chairman also believed that the subprime boom would boost home ownership and was "worth the risk."
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While Greenspan's goal of boosting home ownership (or his expected outcome of those results) should be admirable, the fact of the matter is that for many people that home ownership was for a house of cards that is crashing down far too easily.

In this news article Greenspan goes on to claim if not this, then something else would have befallen the economy.  Possibly.  Maybe.  Maybe not.

The fact is that Greenspan doesn't know that for sure, and he is every bit as guilty of practicing voodoo economics as I have said in past articles here at JU.com.

Perhaps the bloom is coming off the rose for Greenspan's legacy as an economic genius.  I don't know, and honestly don't care if it does or doesn't except for the fact that the results of his work are what we lived with in 2001 and 2002, and what we seem to be living with now in 2008.  All while others (i.e., the President of the U.S.) take blame (in Bush's case) or take credit (in Bill Clinton's case).  I would just remind readers that people like Greenspan and Bernanke (who followed him) make decisions that have much more impact on our every days lives than the decisions that are made by most elected individuals, including the President of the United States.  While Congress calls the Fed Chairman (whomever it may be) in frequently to give testimony on the economy and economic practices, their role, and the role of the President of the U.S. has no where near the impact and immediacy of impact that the Fed Chairman does.

I hope for all of us that the economy can be improved quickly, but the realist in me sees the current real estate market, job markets, and economy in general and expects it may take a while for the market to sort itself out here.  Meanwhile Bernanke continues to try to correct things, and hopefully won't keep turning the wrong way on the icy roads (see my recent article on similar topic for more info on that analogy).

 

833 views 3 replies
Reply #1 from JoeUser Forums Top
Gee, I scooped the Washington Pest

And they are wrong. It was not keeping them too low too long, it was how low they went, and then how fast they climbed. The Fed Rate is supposed to be used as a governor, not the gas pedal and brake. Yet that is what occurred post 9-11.

But in all honesty, Greenspan was not a bad Fed Chariman, just not a very good one. Volcker will remain as the Fed Chairman that all others will be judged by. He basically made the fed (to the chagrin of some) as a force for Monetary policy and used the maxim of "the best solution is often nothing".
Reply #2 from Stardock Forums Top

The Fed Rate is supposed to be used as a governor, not the gas pedal and brake. Yet that is what occurred post 9-11.
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Bingo!  That's exactly the type of problem I was trying to describe in an earlier article on this same subject.

The Fed -- under Greenspan and Bernanke -- has freaked out too early when it comes to possible inflation and jacked rates up too quickly for the markets to respond.  As you say here, they hit the brakes full on and very suddenly.

Later when they realized that they had gone too far (realizing it too late too!) they move from the brake pedal to the gas and smash the pedal to the floor in cutting rates to keep the economy going.

The economy can't react so quickly, or at least the core of the economy can't.  The fringe elements that love to try to take advantage of 'opportunities' (to get rich quickly) do move quickly, see the opportunities, sieze them, and use these opportunities for nefarious purposes (or at least for less than reasonable purposes).

Sins of a Solar Empire: Rebellion
Reply #3 from JoeUser Forums Top
The economy can't react so quickly, or at least the core of the economy can't.
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You are right, and they are not watching the economy (unfortuantely). They are watching the stock market which does react that fast, but not accurately.