Greenspan's Britney Moment

• Email
• Share
• Print

Battle of the bad
If you thought Britney's out-of-lip-sync, lumbering pantomime at the MTV Video Music Awards was bad, you ain't seen nothin' yet.

By my scorecard, the worst video-clip performance of the week goes, hands down, to ex-Federal Reserve Chief Alan Greenspan. Honestly, the only thing that could have made it worse is if Al had done it in a sequined bikini. If you're too busy to watch the ex-Chair get his excuse on (click here), I'll give you my jaded, 10-second paraphrase:

"Subprime mess? Not my fault. After all, I didn't 'really get it' until late 2005 or 2006. And there's nothing we coulda done anyway. That means the housing bubble ain't my fault, either, because, hey, who could have seen it?"

Disingenuous denial
I won't mince words: I find this an incredibly disingenuous, if not cowardly, attempt to weasel out of responsibility for the current economic mess. (It's far from unique, of course. Bankers who got insanely rich during the bubble have been making similar excuses.) Greenspan is not a stupid man. There's no way he could have failed to understand the dynamics of what was going on. It takes only a bit of eighth-grade Econ 101 to see the problems in the "housing boom."

Following Al's post-9/11 free-money policy, along with his praise of fancy new debt instruments, home prices were zipping upward at an unprecedented double-digit pace. Of course, homes, being capital-consuming assets, weren't really worth any more than they had been in the past. Nor could the price increases be attributed to frothy wage growth, as real incomes were somewhat stagnant over the period, and certainly not matching the pace of housing prices.

Too simple for a Ph.D.?
Why, then, the big jumps in home prices? This is an equation with very few variables, so we're left with only one explanation for the increase in home prices: excess demand fueled by cheap financing. And why was financing so cheap? Because anyone with a pulse could get a subprime, Alt-A, no-money-down, low-or-no-doc, interest-only, or option-ARM from the likes of Countrywide Financial (NYSE: CFC), NovaStar Financial (NYSE: NFI), Accredited Home Lenders (NYSE: LEND), and even the big banks like Citigroup (NYSE: C), Bank of America (NYSE: BAC), or Washington Mutual (NYSE: WM).

These gimmicky and risky loans -- allegedly designed for "sophisticated real estate investors who need flexibility in their cash flow" -- were actually being hawked everywhere. I heard them on brainless commercial radio ads, right behind the latest Britney singles. (And it still goes on. There's a decent chance that there's a crummy mortgage being hawked by a display ad on the very Web page you're reading now.) Recent news reports have revealed exactly why: The lenders made more money on these risky bad loans, and they pushed them harder in order to maximize their own paychecks and their firms' short-term profits.

Foolish final thought
It didn't take a genius to realize that lenders were making bad bets. You only had to look at where the money was going and how the credit was structured. Greenspan should have been well aware of the huge percentage of non-conforming loans that were being made and the number of adjustable-rate mortgages that were in the pipeline. If he says he couldn't see it, I see only a couple of possible explanations for that statement: Either he's lying because it's politically expedient to do so, or he was just too smart for his own good and too busy with abstract, high-level policy-pondering to see the obvious financial rot in front of him.

Neither explanation bodes well for Greenspan's legacy. Let's hope current chair Ben Bernanke has the courage and the common sense to do better.