Greenspan Says He Was Mystified by Subprime Market
By DEALBOOKArticle Tools
Alan Greenspan, the former chairman of the Federal Reserve, told CNBC in a documentary to be shown Thursday night that he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.
“So everybody in retrospect now knows that that boom was developing under the markets for quite a period of time, but nobody knew it,” Mr. Greenspan told CNBC’s David Faber. “In 2004, there was just no credible information on that. It wasn’t until we got well into 2005 that the first inklings that that was developing was emerging,” he said.
Mr. Greenspan’s critics have argued that the former Fed chairman expanded the money supply well beyond the growth in the nation’s gross domestic product by keeping interest rates too low for too long.
The Fed’s “easy money” policy created an excess of cash that inflated equity and asset prices, leading to both the technology bubble of the late 1990s and the housing bubble in this decade.
While Mr. Greenspan acknowledges that he could have done something to avert the housing crisis, he contends his hands were tied.
“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?” Mr. Greenspan said. “When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”
Mr. Greenspan said that if he had taken steps to prevent the crisis, the outcome would have been painful.
“We could have basically clamped down on the American economy, generated a 10 percent unemployment rate,” he said. “And I will guarantee we would not have had a housing boom, a stock market boom or indeed a particularly good economy either.”
Mr. Greenspan also lays the blame on the ratings agencies and the people that trusted their judgment for the proliferation of the mortgage derivatives that were a major part of the current financial crisis.
“What we have created in this world is an aura around the credit rating agencies about certification from them is the Good Housekeeping seal of approval, ” Mr. Greenspan said. “I will tell you the record of a lot of the forecasters of ratings have not been distinguished. They never were.”
The interview is part of a two-hour documentary, “House of Cards,” to be shown on CNBC on Thursday at 8 p.m. and 12 a.m. Eastern time.
–Cyrus Sanati
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Greenspan, try Wiki next time
— Ernie LynchSo whose fault was it then?
If you read the 1934 edition of Security Analysis it seems Graham is describing the exact same situation, right down to bond insurance being worthless (p185-6) – so how come this was allowed to happen again when it has already been experienced and documented?
— Fire the Incompetentsgreenspan was just part of a system that spun out of control; blaming him is like blaming the skies for raining on a parade…..
— chris hauserIf there is any single person who can be singled out for extra credit (no pun intended) in creating the mother of all meltdowns, it is this man.
— williambanzai7‘Maestro’ in over head, eh? What a surprise. I’m sure he’ll have more honorary degrees coming down the pipe. What a tool for the powers that be.
— JimHow did he get his job in the first place? The best thing for everyone’s good would be for him to permanently disappear from the public life. Or face a jail time.
— MiroWareThe inevitable happened. “A Demon Of Our Own Design”: read it.
— nickThat’s simply not true. Warren Buffet has been talking about it – or at least hinting about it – since 2002. I’m just glad Greenspan is finally getting the blame.
— b-#3: I very much disagree. Blaming him is not “like blaming the skies for raining on a parade”. Anticipating systemic risks is very much part of the Fed Chairman’s job.
There were a number of academics, journalists and bankers I can think of, warning of the preprogramed disaster subprime lending was, of the illusion of massive de-risking through CDOs, of the real estate bubble which bore no relation to past income and affordability ratios etc etc. These warnings were voiced early this decade, not “well into 2005″.
Of course it is very easy in hindsight but the fact is that Greenspan was one of the key people at the helm (a role he clearly relished) and he made a massive mistake. His claims to the contrary are ridiculous and embarrassing considering his intelligence.
— ThomasThe interesting thing is that Alan Greenspan still doesn’t understand, and with him hordes of mainstream economists, which is why a ton of measures are sieved into the economy at unprecedented cost and waste. Just the bank bailouts will cost more than all off the income tax and all of the mortgage interest payments, combined! Nobody in Washington seems to see that link and instead of focusing on the symptoms one might be much better off by focusing on the causes (too much credit, for one).
If you are interested in off-the-beaten-track research and analysis, please go to my article series at http://www.ireport.com/people/hrtschudi.
H.R. Tschudi, economist and entrepreneur, Vancouver
— H.R. Tschudihve you noticed that greenspan is never talked about on nbc, msnbc etc because is wive andre mtichel reports for them?
— tom boscoHe is either delusional or disengenuous or he completely misunderstood his role as fed chairman. Take your pick. Direct from his mouth: reputation destroyed.
— andrewAlan Greenspan used to support the gold standard, and was against the idea of a federal reserve bank. He was close friends with the pro-freedom Ayn Rand. The, in the 1980s he changed his tune when he started working in the government. So either he sold out to the bad guys, or he tried to bankrupt the system like Francisco D’Anconia from Atlas Shrugged. I think that for him to blame capitalism and deregulation for the current crisis is completely irresponsible… he knows better than this! Could it really be that this was all intentional?
— sergio28 years of wrongheaded trickle down “reaganomics” is what got us to this sorry state, of which Greenspan is a prime proponent!
— Mike ElwellGreenspan is a fool. He was warned as far back as 1993 about derivatives by Rep. Henry Gonzalez, the Chairman of the House Banking and Currency Committee, and yet Greenspan did nothing because he thought he was smarter than everyone else. The man deserves to be put in jail for his negligence of duty.
— Subir GrewalWhy are people still asking this idiot questions?
— ChrisSo Greenspan didn’t try to avert the crisis because it wouldn’t have “gone over very well with the Congress”. Guess their response mattered more than giving a heads-up to American home-buyers and investors.
— Carola Von Hoffmannstahl-Solomonoffi feel so much better now knowing he was mystified. all i remember from his brilliant years at the helm was “home ownership is good” or some nonsense to that effect. alan suffered from a condition even older than he is: he bought into his own hype.
— jayHauser is a fool…there is always a human to blame. Why are you covering that up? People who blame the “system” are a big part of the problem. One reason these criminals get away with the things they do is because of fools like Hauser.
— AmericanCheap, easy shots at Greenspan aside, he is probably right that there would have been extreme political resistance to deflating or slowing the housing bubble if acknowledged.
The Bush recovery had nothing to brag about other than the booming housing market.
I was a local official in 1996-2000 during the Internet and stock boom. In my community there was a building boom as well. Commercial developers,drunken in their prospects, would plead with us not to take away then goose that laid the golden egg. Then, even I knew that markets were inflated and things would “correct.” I based my sobriety on a historical knowledge that the Fed provided the “sobriety of last resort” and would surely take away the punch bowl to this party that had gone on too long and gotten too wild.
By 2000 we were begging for a recession, it was so crazy in Silicon Valley.
Since 1996, Fed policy seems to have changed. It no longer knows or has the courage to face down society and politicians, drunk on phony asset valuations a false wealth. It no longer leans into the economic wind.
Now the political calculus seems to be, during booms don’t raise taxes, or interest, reduce deficits for fear of slowing growth, and during recessions don’t raise taxes, or interest for fear of blocking recovery.
If the Fed doesn’t provide counter-cyclical sobriety and take away the punch bowl, who will?
— PaulCFew Americans know that the Federal Reserve is a private institution that lends money to the US government at interest rates it creates at its own discretion. By definition, it is a travesty to begin with, and for Greenspan to use the Stalag 17 ‘I know nothing…you hear me… nothing!’ excuse is an outrage and a lie.
As the editor of http://tvnewslies.org explained before this economic meltdown ran amok:
The real answer to this question is that the Federal Reserve is like a big Mafia loan shark. It owns our nation in the same way a loan shark owns his “clients”! There is absolutely no difference between the two.
I am certain that the interview blames the mortgagees who were duped into loans they believed would be renegotiable as they ballooned. The criminals at the top never, ever, take the blame for their crimes.
— Reggie from NYCWhat’s not to understand? Giving hundreds of thousands to people with bad credit and fake jobs and expect them to keep up with the payments? They were bad loans it’s jsut that simple. Then the companies sold fake insurance on the portfolio.
— mortgage undwerwriterAnd even then it’s still a hell of a stretch.
— BootGive us back the 3 Trillion wasted on the Iraq war and this all goes away. Greenspans not at fault for the disastrous economy, only the compounding of it. Then again, the fed has too much unfettered, unsupervised power. Congress should have a finance guy too.
— WisdoUncle Marx was correct after all the advanced China showing the way! What irony!
— Nicholas XenakisBetter that uncle Sam.