Alan Greenspan: "The Fed Didn't Cause the Housing Bubble"

piezoe · Mar 12, 2009

Quote from Pa(b)st Prime:

Don't confuse correlation with cause and effect. Mortgages trade at a spread to long dated Treasuries, i.e. 10's and 30's.
The economic factors effecting the trader/market derived yield of Treasury securities produce the very same information driving FOMC policy.

Greenspan often testified that the 2yr "made him do it." IOW's if the market receives "good" economic data then traders take Treasuries higher in yield (lower in price). After the "market" reflected bullish economic sentiment the FOMC would then raise the Funds rate in kind.

This may shock inside the box ET'ers but it's just as possible that Greenspan's rate hikes from 2003-2006 were contributory to the lending crisis than his rate cuts during the legitimate 2001-2002 recession abetted asset appreciation.

You all need to understand if policy and it's ramifications didn't produce nuanced, ambiguous results then we'd game it freely and be rich.

Pabst, please correct me if i'm wrong (i know i can count on you for that at least

) but i thought that it was all the way into November of 2003 that Greenspan kept lowering rates even though by then the market was in an uptrend and it appeared that we were well on our why out of the recession. In fact, wasn't it at the Nov 2003 meeting that the Fed took the rates to a then historic low. If i'm right about this, then i have to question why the Fed kept easing for so long. If i recall, Greenspan expressed some concern about deflationary pressures at that time, but that does not really make a lot of sense either. I always assumed that he was just tooling up for the 2004 election and wanted to make sure that the economy was sufficiently goosed to give his ole buddy George a helping hand.

It is also interesting to note that although Greenspan had the authority to clamp down on irresponsible mortgage lending, even after he was well aware of the ridiculous loans being made he still did not use the authority congress had given him. I guess he really believed that the mortgage market would self-correct.

P.S. don't bother to point out how cynical i am. I already know it.

Pa(b)st Prime · Mar 12, 2009

Cynicism is a winning trait among traders piezoe.

Actually the last rate cut was in June of 2003-just three months after the market bottomed. Interestingly the unemployment rate reached it's highest level (6.3) of the recession that very month. So the economic data at the time wasn't too pretty.

More importantly Bond futures traded their lowest yield in till then history that month too.

Quote from piezoe:

Pabst, please correct me if i'm wrong (i know i can count on you for that at least ) but i thought that it was all the way into November of 2003 that Greenspan kept lowering rates even though by then the market was in an uptrend and it appeared that we were well on our why out of the recession. In fact, wasn't it at the Nov 2003 meeting that the Fed took the rates to a then historic low. If i'm right about his, then i have to question why the Fed kept easing for so long. If i recall, Greenspan expressed some concern about deflationary pressures at that time, but that does not really make a lot of sense either. I always assumed that he was just tooling up for the 2004 election and wanted to make sure that the economy was sufficiently goosed to give his ole buddy George a helping hand.

P.S. don't bother to point out how cynical i am. I already know it.