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

[gnome]

Quote from ByLoSellHi:

Good point, excellent question.

Perhaps most didn't notice... there was "coordinated hyper-monypump around the world" from all (or nearly all) of the central banks... for 5 years or so... lead to housing bubble all around.

It was like either (a) they were STUPID, IRRESPONSIBLE, NEGLIGENT BEYOND ALL BELIEF...PERHAPS EVEN CRIMINAL... or, (b) they were "trying to get away with something".

 

[Fractals 'R Us]

Quote from wavel:

"Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy."

An interesting challenge.

That sums up what BO has to do and so far he's fumbled the ball at every turn IMO.

There are $Billions around the world sidelined, waiting for an economic environment that provides some hope. Most of it is sidelined for a very good reason, the banking situation is untenable. Once investors believe that the banking situation makes some sense, that money will come back in to play. It won't be this year likely and it won't be next year if the amateurish Democrats don't get some traction with intelligent people around the globe.

 

[hofficita]

Quote from Pa(b)st Prime:

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.

How do you figure this?

 

[Pa(b)st Prime]

Quote from hofficita:

How do you figure this?

What did the yield curve do during the rate hike cycle? Flattened into a point of brief inversion!

So while Greenspan was actually attempting to arrest price growth by raising the Funds rate seventeen consecutive meetings the Bond vigilantes were saying "not so fast." Bonds were making a statement akin to "yes, of course we see commodities, stocks and real estate soaring but deep down we think the economy sucks."

At the same time the Greenspan rate hikes reflected concern over inflation the bond market said inflation will be muted because sustained growth isn't on the table.

Paradoxically, mortgage rates being more sensitive to the longer end of the curve remained low while policy was becoming less accommodate. And as we all know, a flat curve equals bad news for leveraged lenders.

 

[trendlover]

Quote from Pa(b)st Prime:

What did the yield curve do during the rate hike cycle? Flattened into a point of brief inversion!

So while Greenspan was actually attempting to arrest price growth by raising the Funds rate seventeen consecutive meetings the Bond vigilantes were saying "not so fast." Bonds were making a statement akin to "yes, of course we see commodities, stocks and real estate soaring but deep down we think the economy sucks."

At the same time the Greenspan rate hikes reflected concern over inflation the bond market said inflation will be muted because sustained growth isn't on the table.

Paradoxically, mortgage rates being more sensitive to the longer end of the curve remained low while policy was becoming less accommodate. And as we all know, a flat curve equals bad news for leveraged lenders.

Pabst, with the bond market you say it showed no more growth. How? Because the growth was from people taking equity from their homes? And that is not real growth right?

 

[hofficita]

Quote from Pa(b)st Prime:

What did the yield curve do during the rate hike cycle? Flattened into a point of brief inversion!

So while Greenspan was actually attempting to arrest price growth by raising the Funds rate seventeen consecutive meetings the Bond vigilantes were saying "not so fast." Bonds were making a statement akin to "yes we too see commodities, stocks and real estate soaring but deep down we think the economy sucks."

So while the Greenspan rate hikes reflected concern over inflation the bond market said inflation will be muted because sustained growth isn't on the table.

Paradoxically, mortgage rates being more sensitive to the longer end of the curve remained low while policy was becoming less accommodate. As we all know a flat curve equals bad news for leveraged lenders.

Yes, but what is the alternative. Let short rates remain negative in real terms indefinitely? You just get a bigger bubble.

You are right that if he had raised rates even more aggressively he would have killed the leveraged lenders sooner, but they are dead now anyway. It was imperative for the fed to stem the rise in housing prices simply because housing is one of the few essential consumer items. They needed to protect the value of money by raising short rates hard and fast.

I know you will say that this still would have left long rates enticingly low for home buyers (mainly because of chinese and japanese bond buyers, not bond vigilantes). But given the choice between buying a house (even with a 4% mortgage rate) and getting 10% in a savings account, most rational people will forgo buying a house and save, which was desperately needed. In addition, the banking system would have been healthier as a result of the savings.

 

[Pa(b)st Prime]

Quote from trendlover:

Pabst, with the bond market you say it showed no more growth. How? Because the growth was from people taking equity from their homes? And that is not real growth right?

Hey TL. I wasn't on the right side of the trade-I was persistently short Bonds worrying about inflation. And yes much of the consumer spending was spurred by appreciating assets. But the argument from the bulls who were proven correct was that for all the ballyhoo of rising stock and home prices, job creation never really kicked off with any gusto after the 01-02 recession. Very tepid. Let's face it: Stocks in toto didn't top in 2007-they topped in 2000. We can list a zillion stocks that came nowhere near their 2000 highs including MSFT, INTC, CSCO, GE, GM, AIG. The list is quite long. So the Bond bulls knew that in the macro, the 03-07 "recovery" was nothing to hang a hat on. Heck toss out oil stocks and the weaker dollar helping exporters and the rally was very narrow.

Another thing never mentioned is the effect the 2000-2002 stock crash had on investors and home prices. I for one remember saying at a party in 2000 that "I'd rather buy a house than buy a tech stock at 100x earnings." Obviously much of America felt the same......

 

[trendlover]

Quote from Pa(b)st Prime:

Hey TL. I wasn't on the right side of the trade-I was persistently short Bonds worrying about inflation. And yes much of the consumer spending was spurred by appreciating assets. But the argument from the bulls who were proven correct was that for all the ballyhoo of rising stock and home prices, job creation never really kicked off with any gusto after the 01-02 recession. Very tepid. Let's face it: Stocks in toto didn't top in 2007-they topped in 2000. We can list a zillion stocks that came nowhere near their 2000 highs including MSFT, INTC, CSCO, GE, GM, AIG. The list is quite long. So the Bond bulls knew that in the macro, the 03-07 "recovery" was nothing to hang a hat on. Heck toss out oil stocks and the weaker dollar helping exporters and the rally was very narrow.

Another thing never mentioned is the effect the 2000-2002 stock crash had on investors and home prices. I for one remember saying at a party in 2000 that "I'd rather buy a house than buy a tech stock at 100x earnings." Obviously much of America felt the same......

Ok, your language is technical, but I think what you are saying is the big picture time frame show a down trend, but the shorter view was up. Easy to be fooled to stay in too long.
Thank you for your explanation.

 

[the1]

It started earlier than this. The money supply expanded parabolically beginning in 1995. The democratic AA Lending Legislation can also be traced back to 1995.

"It was Fannie Mae and Freddie Mac, the two so-called Government Sponsored Enterprises (GSEs), that lay behind the crisis. After regulatory changes made to the Community Reinvestment Act by President Clinton in 1995, Fannie and Freddie went into hyper-drive, channeling literally trillions of dollars into the housing markets, using leverage and implicit taxpayers' guarantees. "

Note: Unfortunately, I can't locate the source.

Quote from gnome:

To claim the Fed (specifically GreenScan) did not "cause" the crisis is picking nits. The actual beginning of the mess (can we use the word "caused" here?) was the DemoCraps Affirmative Action Lending legislation in 1999. THAT'S undeniable.

 

[the1]

Here's the source:

http://www.ibdeditorial.com/IBDArticles.aspx?id=321237362312361

The blame for this financial crisis lands squarely on the shoulders of Alan Greenspan and Bill Clinton. The Federal Reserve, along with the President of the US, and Congrees, caused this crisis. Greenspan can shift the blame all he wants but the facts simply don't lie. Debt based currencies that are printed into infinity will always collapse.

Quote from the1:

It started earlier than this. The money supply expanded parabolically beginning in 1995. The democratic AA Lending Legislation can also be traced back to 1995.

"It was Fannie Mae and Freddie Mac, the two so-called Government Sponsored Enterprises (GSEs), that lay behind the crisis. After regulatory changes made to the Community Reinvestment Act by President Clinton in 1995, Fannie and Freddie went into hyper-drive, channeling literally trillions of dollars into the housing markets, using leverage and implicit taxpayers' guarantees. "

Note: Unfortunately, I can't locate the source.