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December 12, 2007

Greenspan Sharpens His Comedy Routine
by Brady Willett

In today's Wall Street Journal former Fed boss, Alan Greenspan, attempted yet again to explain why he wasn't to blame for all the 'bubbles' that coincidentally transpired during his tenure. In the piece Greenspan adds color to the same storylines he has harped on before, those being 1) that he took the Federal Funds rate down to 1% because he was scared of deflation, and 2) crazy investors, not him, are to blame for the euphoric booms in stocks and real estate while he was Fed boss.

Perhaps recognizing that people are growing tired of this routine, Greenspan did manage to make a frank admission in today's piece:

"I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages and may have contributed to the rise in U.S. home prices."

But just when you thought that Alan was coming clean he quickly added:

"In my judgment, however, the impact on demand for homes financed with ARMs was not major."

Needless to say, the commentary turns comedic when Greenspan gets going on another trademark 'don't blame me!' rant.

"After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own. There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century."

Here is an idea Greenspan: when Fed governor Edward Gramlich comes to you in 2000 and says banks are making risky home loans, your response should not be to do absolutely nothing.

"For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it's not clear to me we would have found anything that would have been worthwhile" June 9, 2007

If a cop stands idly by whilst crimes are being committed we call them dirty. Are we to believe that Greenspan's hands are clean simply because he was too lazy to do anything to monitor or stop the mortgage industry from running wild for more than a decade? (for an excellent historical account of how 'chattel loans' presaged 'subprime' click here)

In short, Greenspan heard the screams, the gunshots, and what sounded like bodies hitting the floor, but rather than do his job and investigate he preferred to do nothing. Sadly, as Greenspan continues to pen missives and keep us laughing, it is the U.S. Treasury Department, the White House, and Bernanke's Fed that are left to try and raise the dead.

Brady Willett
FallStreet.com

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