Alan Greenspan deserves some credit for admitting to Congress last year that he made mistakes in not foreseeing the mortgage crisis, but his latest statements in a CNBC documentary, “House of Cards,” suggests he still has not come to terms with the full extent of his failure on the issue.
Alan Greenspan, the former chairman of the Federal Reserve, told CNBC in a documentary to be shown Thursday night that he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.
“So everybody in retrospect now knows that that boom was developing under the markets for quite a period of time, but nobody knew it,” Mr. Greenspan told CNBC’s David Faber. “In 2004, there was just no credible information on that. It wasn’t until we got well into 2005 that the first inklings that that was developing was emerging,” he said.
Mr. Greenspan’s critics have argued that the former Fed chairman expanded the money supply well beyond the growth in the nation’s gross domestic product by keeping interest rates too low for too long.
The Fed’s “easy money” policy created an excess of cash that inflated equity and asset prices, leading to both the technology bubble of the late 1990s and the housing bubble in this decade.
While Mr. Greenspan acknowledges that he could have done something to avert the housing crisis, he contends his hands were tied.
“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?” Mr. Greenspan said. “When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”
Mr. Greenspan said that if he had taken steps to prevent the crisis, the outcome would have been painful.
“We could have basically clamped down on the American economy, generated a 10 percent unemployment rate,” he said. “And I will guarantee we would not have had a housing boom, a stock market boom or indeed a particularly good economy either.”
This is a complete cop out on the part of Greenspan, and shows the danger of brilliant economists who get too immersed in the details. They become obsessed with the data and how it fits into their models, but can’t step back to see problems that can be seen by anyone with common sense.
First, the crisis was not limited to sub-prime. It was obvious at the time that many middle-class Americans were buying homes they could not afford, using exotic “interest-only” mortgages. Plenty of experts warned that these could be problematic if the economy turned south, but Greenspan and the administration did nothing. Once Americans started flipping homes like stocks, Greenspan should have known we had a major problem on our hands.
Second, most people understood that there was plenty of fraud in the system. Greenspan goes on to blame the rating agencies, and he’s correct on that front. The rating agencies should be investigated for fraud and gross negligence for their role in this crisis, and Wall Street banks need to be investigated to see just how much they really knew about the mortgages underlying the bonds they were buying and selling.
As for what Greenspan could have done, he’s presenting a false choice that betrays his real concern. He was obsessed with keeping economic growth going, and he suggests that he was concerned that any intervention here could have killed the party.
Well, the party has certainly ended, and the damage is staggering. By 2006 it was obvious that we had a real estate bubble. Greenspan helped to cause it with his loose money policy, and he did nothing to stop it once it became obvious we had a problem.
