Greenspan, here is what you said before.
Posted by Frugal on September 24th, 2007
Greenspan supported tax cuts back in 2001 (01/25/2001 from CNN Money). Greenspan again defended his position on tax cut in 2005 (’01 Tax Cuts Were Justified, Greenspan Maintains, 3/16/2005 from Washington Post). Now Greenspan is criticizing Bush’s tax cut that he supported (9/14/2007 from Bloomberg). And he says he is mis-interpreted?? Hey, Greenspan, if you are mis-interpreted, you have let it go for 6 years. And I thought you really like to speak up and express your opinions?
Greenspan says ARMS might be better deal (2/23/2004 from USA Today). This is just right before the first interest rate increase in June 2004. What does that mean that ARMs might be a better deal? Is that an encouragement for would-be homeowners to take up the extremely low initial teaser rate at 1%, with the potential of resetting to 5% later? And you said that you don’t get how subprime mortgages were rampant until late 2005/2006. I wonder who specifically taught the homeowners about all the benefits of ARM.
On the housing bubble, Greenspan defends himself in an interview:
Greenspan argues that the Fed mainly has influence over short-term interest rates, which affect adjustable-rate mortgages, a small portion of the overall mortgage market. Long-term interest rates, which influence fixed mortgage pricing, are somewhat beyond the Fed’s control and became more so earlier this decade.
“We tried to push them up in 2004, and we failed,” he says. “What we found was that the global forces of disinflation were far too powerful for even the Federal Reserve. We tried again in 2005, and we failed.”
Greenspan notes that if the housing bubble was the Federal Reserve’s fault, why were similar such bubbles — many of them worse than what was seen in the USA — created around the globe?
Sorry, Greenspan, I don’t buy that at all. If you want to say that globally there were also other housing bubbles, and so, it was not your fault, then you should refrain from taking all the credits for the low inflation due to the low manufacturing wages from globalization. It’s simply your job of watching over US economy, whether there are globalization factors or not. With increasing globalization, inflation in the USA is spilling over to many countries, especially in countries where there is a currency peg or link to US dollar. Greenspan/Clinton simply got lucky to take the ride in the best part of globalization.
Mis h has an excellent review on Greenspan’s words (click to read more). Greenspan’s lies are obvious to those who remember.
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September 24th, 2007 at 7:43 am
Actually, Greenspan is correct in that ARMs can be a better deal. Note that there is a difference between the regular ARM and the negative amortization ARM you’re talking about. Most ARMs are not even subprime mortgages at all. And mant ARMs are actually so-called hybrid ARMs whose interest rate is fixed for a few years and then variable for the remainder of the loan term.
Here’s why these are actually a better deal in many cases. The average homeowner only keeps his loan for seven years or less. By this time he has either refinanced or moved. So if you only expect to stay in your home for seven years, you ought to get a 5/1 or a 7/1 ARM. Rather than paying a fixed 6.0% interest rate for 30 years, you could pay a 5.75% rate for 5 years; after this point it becomes adjustable. You’ll save quite a bit of money for these 5 years in having a lower interest rate. For the remaining 2 years you’ll stay in your home, you may pay a higher interest rate, but most likely you’ll still come out ahead. If you get a 7/1 ARM, this won’t even matter at all, as the lower interest rate will be fixed for the entire time you stay in your home.
Sure there’s some risk, as you never know what will happen in the future. Nobody knows what interest rates will do in the future, and nobody knows exactly how long they’ll stay in their home. But on average, having an ARM actually works for you, and you pay lower interest costs during the time you stay in your home.
September 24th, 2007 at 11:36 am
I think the moral of the story is to ignore the noise surrounding central banks and focus on what the market is doing. Sure the market may have jumped last week, but no one will remember that if the secular bear market becomes apparent in the next two months.
September 26th, 2007 at 1:34 pm
I am so tired of listening to former officials bitch about the Bush policy. It’s not that I think that they are wrong when they blame him for getting us into a deep hole, it’s that I can’t help but wonder why it is that they waited until they left office before they spoke up. Isn’t it the job of a good official to point out the errors and correct them while he is still on the job? What is the point of saying “I knew that” if you did not act on your supposed knowledge or even acted counter to that information.
Seriously Washington folks: Stop selling us books, start getting policy right.
October 1st, 2007 at 6:22 am
Rick,
At other times, I would have agreed with you that ARM could have been a better choice. But making such comment when the long term interest rates were at historically low (in 20+ years), and also when the housing bubble froth was quite clear at various regions, is simply irresponsible from a Fed chairman.