A place for residents of Marin County, CA and others to express their views regarding the real estate bubble and in particular the Marin real estate market
Sunday, January 28, 2007
How Will History Judge This Man?
...Alan Greenspan is either depraved or a fool and, of the two, I am not sure which I feel worse about as describing the man who was at the helm of the monetary bobsled during the longest stretch of paper credit expansion the world has ever seen.
Let’s play ‘connect the dots’:
1. In December 2002, private bankers warned Greenspan that consumers were taking on worrisome amounts of debt and that an unsustainable, interest rate driven housing bubble was fueling this behavior (page 22 of this linked document [PDF]).
2. In July of 2003 Greenspan lowered interest rates to one-percent (as in 0%, or one-point-oh), an emergency rate, and held it there for over a year (see chart below).
3. In February of 2004 Greenspan advised Americans that they’d be better off with adjustable rate mortgages (ARMs) than they would with fixed rate mortgages.
4. In October of 2005, the new bankruptcy law, largely written by private banking lobbyists and insiders, was passed.
Here’s how those data points look when plotted out on a chart of short-term interest rates:
To summarize; (1) Mr. Greenspan was warned that he was igniting an unsustainable asset bubble, (2) he threw more gasoline on the fire, (3) he then advised consumers to switch to ARMs right before what he knew (for certain) would be a protracted period of rising interest rates, and then (4) kept mum while bankers worked feverishly to pass bankruptcy legislation that was indisputably banking-friendly but a consumer nightmare.
Now here’s the interesting part about the story. To consumers, Adjustable Rate Mortgages (ARMs) are good or bad depending on whether interest rates are rising or falling. When interest rates fall the ARM adjusts down with them. The reverse is true when rates are rising...
But when we refer to the four data points in the chart above, we observe that Mr. Greenspan advised consumers to take advantage of ARMs right before the onset of what he knew would be a multi-year rate hiking campaign. Obviously he advised people to do the exact opposite of what they should have done.
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