The French philosopher Voltaire opined that history “consists of a series of imaginative inventions.”
Apparently, former Federal Reserve Chairman Alan Greenspan agrees.
Since the recession moved from a hint to a full-blown financial crisis, Greenspan has been on a redemption tour. After his precipitous fall from rock star status, the now-retired monetary maestro has been trying to soften history’s view of his role in triggering the deepest economic calamity since the Great Depression.
In his first incarnation, Greenspan was the shaken sage, stunned that greedy and reckless short-term behavior could overwhelm long-term, rational self-interest. Now in the hope that history will remember him more fondly, Greenspan is trying to re-write the narrative of a catastrophe in which he played a key role.
As he has progressed from grief to denial, Greenspan has morphed from humbled headman to a decidedly prickly whiner who is pointing the finger of blame at everyone but himself.
In a lengthy recent op-ed article in the Wall Street Journal, Greenspan attempted to shift the culpability away from his monetary policies and onto … China. According to Greenspan, rapid Chinese growth led to an unexpected “excess” in global savings. That growth kept long term interest rates low, which fueled the housing bubble.
How It Happened
Instead of being the world’s most important financial figure, Greenspan casts himself as the helpless, lowly chairperson of the Fed, powerless to do anything other than control short term rates. Greenspan might as well blame the dog.
Following the dot-com bust in 2001, short term interest rates started to fall. As these rates kept tumbling through 2005, this led to easy credit and record housing starts. Rather than tightening monetary policy to prevent a bubble from forming, Greenspan kept short term rates at historic lows.
While most 30-year mortgages are tied to longer term interest rates, adjustable rate mortgages — ARMs — are not. ARMs were the primary vehicle employed by lenders to fuel the housing bubble, and particularly the widespread proliferation of sub-prime mortgages. Starting in 2003, sub-prime paper accounted for more than one third of all mortgages issued.
The link between Greenspan’s maintenance of a loose monetary policy and the expansion of the housing bubble is clear to everyone but the former Fed Chair. On this point, he continues to be mysteriously myopic.
In an attempt to understand the causes of the 2007 collapse of the sub-prime market and the ensuing bank bailouts, the President and Congress have convened, the Financial Crisis Inquiry Commission. Chaired by former California State Treasurer Phil Angelides, the commission has summoned several key players in the crisis to testify, including Greenspan.
Testifying today before the Commission, Greenspan acknowledged that the Fed failed to grasp the severity of the crisis. He continued to argue, however, that the low interest rate policy maintained by the central bank during his tenure did not inflate home prices.
The Role of Home Loans
Greenspan said the sub-prime mortgage crisis had its root in the securitization of risky home loans into assets that were divided and sold around the world. He insisted that strong investor demand for mortgage-backed securities artificially boosted home prices. Rather than impugn himself, he charged that government-sponsored enterprises, such as mortgage lenders Fannie Mae and Freddie Mac, were the real culprits in the spread of sub-prime loans, not low interest rates controlled by the Fed.
Along with examining the root causes of the crisis, the Commission wants to explore the Federal Reserve’s authority to regulate the banking practices that led to the issuance of trillions of dollars in risky debt and a financial meltdown that compelled the federal government to write billions in bailout checks.
In his testimony, Greenspan continued his theme of powerlessness, telling the panel, “Regulators cannot successfully use the bully pulpit to manage asset prices. And they cannot calibrate regulation and supervision in response to movements in asset prices. Nor can they fully eliminate the possibility of future crises.”
Although he didn’t offer specifics, Greenspan did say that increased capital and collateral requirements for financial institutions could help mitigate future risk and safeguard the system. He also said regulators should do more to prevent predatory lending and address threats posed by institutions considered too big to fail.
But nowhere in Greenspan’s recent 60 Minutes appearance, many articles or recent testimony has there been even an inkling of a mea culpa.
Similar to other actors in this receding global tragedy, Alan Greenspan is desperately hoping that history will absolve him of fault. Like Napoleon, Greenspan obviously ascribes to the view that “History is a myth that men agree to believ.” The former Fed Chair is telling his tale to anyone who will listen.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
