The Fed is “Blameless”
Posted by Frugal on April 9th, 2008
I saw a big typo in the headline by Greenspan. He said “The Fed is blameless on the property bubble“. Actually it should be “The Fed is SHAMEless on the the property bubble”.
Just thought that I should share my thoughts here:
If a ship (economy) goes down that quickly right after the captain took the lifeboat, isn’t the captain at fault in any ways (if not in all ways)?
A man who single-handedly created two biggest bubbles keep saying that he doesn’t know how to tell a bubble from a boom. So who is supposed to know more about economics other than Fed chairman?? So many wiser people before the bubbles burst have warned about tech and housing bubbles. But Greenspan denies even the possibility of recognizing a bubble from a boom. Go figure this man’s IQ. He is either too dumb, or too smart to lie to his low-IQ audience.
Greenspan keeps saying that property bubble was caused by a global glut of saving and global low interest rate. But he doesn’t remember that US economic policy has a big effect globally, and that if US interest rates are going so low (1%) AND so long (more than 1 years), it is very hard for other central bankers to keep both of their interest rates and foreign exchange rates unchanged. The only easy way to keep their economy relatively undisturbed is by following US economic policy (at least in the same trend). The result of a global property bubble only goes to show how much blame Greenspan was responsible for, rather than what he tries to do: confusing people with the results as the cause.
Frugal at 1stMillionAt33.com
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April 9th, 2008 at 7:58 am
i dunno. just because the interest rates are low, it doesnt mean banks should loan money to people who have no ability to pay. if you say he’s responsible for inflation in the housing market, that’s fair. but if you say he’s responsible for the subprime crisis, i dont think that’s right.
April 9th, 2008 at 4:15 pm
Salutations
Your post implies the Fed has a mandate of telling banks and the financial sector in general what to do. I beg to differ.
Its easy to point the finger at Greenspan but one must remember he is not responsible for the yearly budget deficits of the administration or the fact that the commercial balance has been negatives for so long and by so much.
I agree that the Fed”s policy influences the world but it’s far from being as simple as that. People have been living over their means and financial institutions have encouraged them to do so.
If anything, Greenspan, during his years, might just have saved the US economy a lot of hardship. Saying he left and the world economy goes bust is not an argument otherwise we could also say the ship needed the captain and stayed far from icebergs while he was in command.
That was my 2 cents.
Otherwise, keep up the good blog.
April 10th, 2008 at 12:29 am
Frugal,
I agree with you that for Greenspan to argue that the Fed policy had nothing to do with either of the last two bubbles is crap. The low low interest rates that he maintained may have been politically motivated (supporting the Administration’s reelection efforts by demonstrating a turnaround in labor markets). Clearly, he helped to create asset inflation, particularly in real estate and that rapid asset inflation was a major source of the real estate mania.
Greenspan argues, essentially, that long term rates were pushed lower by the carry trade and other features of the global “savings glut” (thus long term rates fell, even as the Fed tightened). However, the Fed could have been more agressive, raising short term rates faster and higher and preventing the worst excesses of 2005 and 2006.
Moreover, to Nicolas’ point - the Fed has more blame here than you think. While it is certainly true that banks should take reasonable steps to confirm that borrowers can meet their obligations, the Fed has broad regulatory power over the very banks who were making many of the lending decisions (though it was not the only regulator that failed to do its job). When it became clear that there was “froth” - the Fed could have changed capital requirements and insisted on non-mortgage collateral which would have put a dent in lending and cooled the housing market.
Bernanke, for what it is worth, could also have demonstrated a willingness to stop the housing bubble, but also chose to stop raising rates shortly after taking office.
Plenty of blame to go around, but fixing the price of credit has to be seen as a major source of the problem.
April 10th, 2008 at 6:10 am
The Fed is in a double bind situation. If the Fed had raised rates, then they would have been accused of killing the economy by making borrowing expensive. If the Fed lowers rates, they are encouraging speculation and heavy borrowing.
So what exactly is the Fed supposed to do? It’s the same with regulation. They’ll be people that say the Fed is “meddling” in the free market if it regulates banks more then they’re those that say the Fed isn’t practicing “activism” to solve problems.
Remember Sarbanes Oxley? What drove the creation of that monstrosity was the collapse of Enron and Worldcomm and it has done nothing to stop the fraud in the housing market that created this mess.
The Fed is in a double bind situation and can’t win no matter what.
April 13th, 2008 at 9:30 am
When Greenspan makes the credit/money close to free at 1%, what are you going to expect others to do? SPEND and USE IT!
Policy drives behavior. Behavior gets the results. At the head of economic tower, I really expect someone with more thoughtfulness.
The so-called “Greenspan Put” didn’t come out of nowhere, but from the continual expected policy from Greenspan.
Price-fixing the interest rate is not capitalism. Free markets will determine the interest rate, rather than by the Fed.
Even when you can’t win in a double-bind, you must determine the less evil. To me, I think 1% was too low, but that was not the main problem. The main problem was he should have raised the interest rate immediately right after 1/1/2000 after there was no Y2K problem to deflate the tech bubble, and also immediately and sharply raising the interest rates after stock markets had bottomed.
Sure, we won’t have so much of a boom, but we won’t have so much of a bust either. There is just no free lunch collectively speaking. Unfortunately, Greenspan’s policy made this free lunch for some, but made majority to suffer the consequences. Big up & down in asset markets are simply NOT good for the society as a whole in the long term.