Economists Point Finger at McCain Mentor Greenspan
In the wake of the near-meltdown of the American financial system this week, economists are finally pointing the finger of blame at Alan Greenspan. As the Washington Post details, the former Fed Chairman once lauded as the "Maestro" is now facing withering criticism for helpful fuel the twin crises of the housing market and the financial system. That can't come as good news for John McCain, who recently summed up his minimal knowledge of economics by noting, "I've got Greenspan's book."
As I noted on Tuesday, Benjamin Wallace-Wells in a stunningly prescient April 2004 article in the Washington Monthly argued that home prices were about to plummet and take the economy down with them. Over the previous five years, Americans had extracted almost $1.6 trillion in cash from refinancing and spent virtually all of it on consumer goods purchases. But as Wallace-Wells noted four years ago, "Greenspan has played enabler to this boom," and concluded:
"To get out of the recession, he had to rely on, stay mum about, and even encourage a housing bubble. Now, that very bubble may be the thing that destroys the recovery he has sought to create."
Now the Washington Post offers a devastating assessment of Greenspan's role in making possible both this week's near calamity on Wall Street and the implosion of the American housing market:
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.
Harvard economics professor and former IMF chief economist Kenneth Rogoff, like Wallace-Wells, took Greenspan to task for not boosting interest rates during the critical 2003-2004 time frame. Greenspan instead chose to keep rates at record lows and even encouraged Americans to move to increasingly high-risk adjustable rate mortgages (ARMs). Rogoff pointed out:
"If you cut interest rates when asset prices are in free fall, then when asset prices are rising while indebtedness is rising all over country, you need to raise rates. He actively chose not to do that."
Greenspan's former vice chairman at the Fed, Princeton professor Alan Blinder, deemed the delay in raising rates in 2003-04 a "minor blemish" on Greenspan's "stellar" record of managing monetary policy. But Blinder gave Greenspan "poor marks" for his supervision of the banking system:
Blinder said that Greenspan "brushed off" warnings -- most notably from fellow Fed governor Ned Gramlich -- about mortgage abuses and dangers.
"Lending standards were being horribly relaxed, and the Fed should have done something about that, not to mention about deceptive and in some cases fraudulent practices," Blinder said. "This was a corner of the credit markets that was allowed to go crazy. It was populated by a lot of people with minimal financial literacy who were being sold bills of goods by mortgage salesmen."
Greenspan's colleague Gramlich, who passed away last fall, offered a brutally frank assessment of the Fed's watchdog role under Greenspan in August. There was "a giant hole in the supervisory safety net…It is like a city with a murder law but no cops on the beat."
For his part, Greenspan remains unrepentant. Adopting the same blissfully unconcerned tone he displayed in his now notorious Financial Times piece on Sunday, Greenspan was quick to defend himself:
"Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it some time"...
...Regarding the current turmoil, Greenspan said that a market crisis was inevitable. "If it weren't the subprime crisis it would have been something else," he said.
Greenspan was especially aggressive in deflecting charges that in early 2004 he encouraged the perilous move to adjustable rate mortgages by American homeowners:
Greenspan said yesterday that he tried to correct those comments on March 2, 2004, less than a month later, in a New York speech praising 30-year fixed mortgages. "If I am guilty of encouraging people to take out adjustable-rate mortgages, I am guilty for 30 days," he said.
History, of course, will judge Greenspan's culpability in the current crises gripping the American economy. But while John McCain crows about reading Greenspan's tome, many leading economist want to throw the book at him.
I have long held that it was Greenspan's monetarist policies which, fearing the 'possible' return of mild inflation, choked off the Dot Com's capital, causing their collapse.