Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009).
Alan Greenspan's reputation has a whiff of terminal decline after his appearance on April 7, 2010, before the Financial Crisis Inquiry Commission (FCIC). Prudence is warranted though, before taking a short position on the former Federal Reserve chairman. The celebrated central banker has spent a lifetime pouring his deep reservoirs of energy and ambition into his own advancement, and now, his legacy.
The pillars of respectability find common ground with Greenspan. Not having foreseen the meltdown of the western world, of what use are they? So, the universities and think tanks offer Greenspan a podium to play the part of scholar even though he makes less sense than Crazy Guggenheim.
Three weeks before his FCIC appearance, Alan Greenspan addressed the Brookings Institute (on March 19, 2010). He presented a 48-page paper, "The Crisis." The title was one of the few honest statements of the day. Greenspan exonerated himself from any blame for The Crisis. It would serve little purpose to address his misstatements, most of which are either absurd or had already been shown to be self-serving fabrications. [See Panderer to Power]
It is worth reviewing the process by which preposterous ideas drain through the establishment sieve and calcify. Greenspan's most glorious success in this respect was on June 17, 1999, when he told Congress: "[B]ubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong. Betting against markets is usually precarious at best." For that hallucination, the economics profession (such as it is) awarded him the Greenspan Doctrine. [For a review of this episode, See February 11, 2010, blog Alan Greenspan: Party Boy
Times have changed. His audience's net worth is no longer tethered to Greenspan's serial bubbles. He could be dismissed, as should be the case, as an unctuous failure. He should be denied a distinguished podium that confers respectability. The Brookings Institute, a prestigious think tank, lent its valuable brand name to the man most responsible for the housing wreckage and who has demonstrated his incapacity to tell the truth since the denouement. The authority of established institutions is in steep decline and stronger moral fiber is required for those that survive.
Greenspan told Brookings' invited guests, who should chide themselves for contributing to the speaker's credibility, that short-term interest rates did not contribute to the housing bubble. The man-who-should-be-too-ashamed-to-appear-in-public stated the absurd: "To my knowledge, the lowering of the federal funds rate nearly a decade ago was not considered a key factor in the housing bubble." (The federal funds rate was cut from 6.5% in 2001 to 1.0% in 2003.)
What was not absurd was deceitful: "[I]t appears the decision to buy homes preceded the decision of how to finance the purchase. I suspect (but cannot definitively prove) that a large majority of home buyers financing with ARMs [adjustable-rate mortgages] were ARMs not being offered (during that period of euphoria), would have instead funded their purchases with 30-year fixed rate mortgages. How else can one explain the peaking of originations of ARMs two years prior to the peak in house prices (exhibit 18). Market demand obviously did not need ARM financing to elevate home prices during the last two years of the expanding bubble."
If the Brookings Institute graded papers, Greenspan deserved the dunce cap. Exhibit 18 conforms to his claim. The chart shows adjustable-rate mortgages peaking at a volume of $250 billion per quarter in early 2004 (data from the Mortgage Bankers Association). It does not show, nor does the Old Pretender mention, that in today's Dust Bowl sections of the country, the volume of adjustable-rate mortgages climbed after 2004. ARMs rose from 2% of mortgages in California in 2002 to 47% in 2004 to 61% in 2005.
It was Greenspan's speech on February 23, 2004, that stripped him of trustworthiness when discussing housing. On that date, he sounded like a shill for the National Association of Homebuilders when he claimed "[m]any homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages over the past decade."
The reason adjustable-rate mortgage growth slowed in 2005 was a matter of affordability. By 2005, over 20% of Californians who bought houses in the previous two years had devoted over one half of their earnings to mortgage payments. Adjustable rates no longer affordable, the interest-only (IO) and negative amortization (NegAm) share of total U.S. mortgage originations rose from 6% in 2003 to 29% in 2005. (Negative amortization mortgages allow the borrower to decide whether or not to make a payment each month. If no payment is made, the principal rises.) Exhibit 18 does not show IOs or NegAms (the line would have looked like a rocket launch), nor, are the terms "interest-only" or "negative amortization" used in the 48-page paper.
Not that Greenspan was unaware of them. Adjustable-rate mortgages in decline, Greenspan pitched these new innovations in a September 2005 speech before the American Bankers Association Annual Convention: "The menu [!!! - Editor's note], as you know, now features a long list of novel mortgage products, not only interest-only mortgages but also mortgages with forty-year amortization schedules and option ARMs, which allow for a limited amount of negative amortization." The consequences of Alan Greenspan cling to us like barnyard odor: $134 billion of Greenspan-sanctioned NegAm loans will be reset this year, and 93% of NegAm borrowers have only made the "minimum payment," meaning, the mortgages will be reset at higher than 100% of the original principal. (Standard & Poor's Research, November 2009)
In this speech he also praised piggyback mortgages and HELOCs [home equity lines of credit] used as piggyback loans: "Highly leveraged home purchasers tend to use so-called piggyback mortgages; that is, second liens originated at the time of purchase." In the next sentence, Greenspan showed he was as familiar with current mortgage subtleties as the highest producers at Countrywide Credit: "These loans are popular, in significant part, because they avoid the non-deductible private mortgage insurance payments required on larger, single loans." Greenspan then told his listeners he was not "worr[ied] that homebuyers are especially exposed to reversals in house prices." If any banker present had doubts about making zero-equity home loans, the nation's top banking regulator had just expressed approval.
Alan Greenspan told the FCIC on April 7 that he warned about the housing bubble in 2002. (This is the same man who has been saying nobody could have predicted the housing bubble.) To prove his point, the worst equivocator since Pinocchio quoted from a Federal Open Market Committee (FOMC) meeting that year. From page 5 of his prepared Statement to the FCIC: "our extraordinary housing boom...financed by very large increases in mortgage debt, cannot continue indefinitely."
First, Greenspan uses ellipses rather than include the most compromising phrase of that sentence: "and its carryover into very large extractions of equity". Second, Greenspan completely misrepresents his intent. He was pleased in 2002 that Americans were cashing out home equity and spending it, but was worried this boost to the economy might be coming to an end. For full, compromising statements made by Greenspan at 2002 FOMC meetings, see April 8, 2010, blog: Greenspan Came Not to Save Consumers but to Bury Them.
We would all benefit if "The Crisis" had received a hostile rebuke from economists. The Great Collapse mystifies the American people. The characters involved and characterizations of their contribution are debated without resolution. But in the case of Alan Greenspan, not only his contribution but also his methods of deception have been catalogued and published. His continued presence as after-dinner speaker, television guest, and party-circuit celebrity in Washington is an affront and insults the American people. "The Crisis" was an opportune time for economists to make amends for their silence during the housing bubble. Maybe the FCIC undressing is the beginning of the end, but a sustained effort is required to quash Greenspan's attempts to upgrade his tattered legacy.
Instead, the most respected academics grovel before their betters and demonstrate their submissive loyalty. Greg Mankiw, Professor of Economics at Harvard University, past chairman of President George W. Bush's Counsel of Economic Advisers, and author of internationally acclaimed college textbooks, opened his review of "The Crisis" with the official interpretation: "This is a great paper...."