Everyone’s favorite ancient Fed chair found himself having a neighborly chat with some government commission today, about who wasn’t to blame for the financial meltdown. Surprisingly, Greenspan is blaming literally every single person on earth except the Fed. Even Communists, in the first paragraph of his prepared statement.
It was the global proliferation of securitized U.S. subprime mortgages that was the immediate trigger of the current crisis. But its roots reach back, as best I can judge, to 1989, when the fall of the Berlin Wall exposed the economic ruin produced by the Soviet system. Central planning, in one form or another, was discredited and widely displaced by competitive markets.
We’re not disagreeing that there is plenty of blame to spread around – he’s been particularly hard on Fannie and Freddie (Greenspan is notoriously hard on the fannie; just ask Ayn Rand). But East Germany has enough problems without you hanging our housing fail on them too.
He even goes on to say, hey, I tried to warn you guys:
In 2002, I expressed concerns to the FOMC, noting that “…our extraordinary housing boom…financed by very large increases in mortgage debt – cannot continue indefinitely.” It did continue for longer than I would have forecast at the time, and it did so despite the extensive two-year-long tightening of monetary policy that began in mid-2004.
What he doesn’t go on to say is his remarks from 2004 where he said a whole lot of “Housing bubble? It can’t happen!”
About three-fourths of all outstanding first-lien mortgages were originated with a loan-to-value ratio of 80 percent or less, and in aggregate, the current loan-to-value ratio is estimated to be around 45 percent. Even though some down payments are borrowed, it would take a large, and historically most unusual, fall in home prices to wipe out a significant part of home equity.
More likely participants in speculative trading are investors in single residence rental and second home properties. But even though in recent years their share of purchases of single family homes has been growing, in 2003 their mortgage originations were still less than 11 percent of total home mortgage originations. Overall, while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity.
So nobody’s perfect, it’s not like you could reasonably expect the nation’s top economist to have a hint that the nation’s economy would take its biggest nosedive in seventy years two years after the bubble he said couldn’t happen, burst. And Greenspan knows he’s not infallible:
Angelides: Would you put this under the category of ‘Oops,’ we should have done it?
Greenspan: When you’ve been in government for 20 years, as I have been, the issue of retrospective and figuring out what you should have done differently is a really futile activity… My experience has been, in the business I was in I was right 70 percent of the time, but I was wrong 30 percent of the time and there are an awful lot of mistakes in 21 years.
Hey, only one out of every three things he says is wrong, that’s not bad, right? Hell of a 30 percent, though.