Alan Greenspan on the Financial Collapse

Former Federal Reserve Chairman Alan Greenspan just published a 66-page letter on the causes of the financial meltdown and how to avoid a repeat. He presents some great points, and several ridiculous ones as well. Here are a few of each.

Great points
1. Fannie Mae (NYSE: FNM  ) and Freddie Mac's (NYSE: FRE  ) role in subprime:

"The firms accounted for an estimated 40% of all subprime mortgage securities … during 2003 and 2004. That was an estimated five times their share of newly purchased and retained in 2002, implying that a significant proportion of the increased demand for subprime mortgage-backed securities during the years 2003-2004 was effectively politically mandated ..."

Wall Street gets vilified for blowing up the financial system. As it should. But a big part of the mortgage mess had nothing to do with Wall Street. It started with commercial banks making shady loans and ended with Fannie and Freddie's political obligation to buy up these loans in bulk. What's scary is there isn't a plan on what to do with these two rascals. Functionally, nothing has changed since they collapsed.

2. On the role of the rating agencies:  

"[A]n inordinately large part of investment management subcontracted to the 'safe harbor' risk designations of the credit rating agencies. No further judgment was required of investment officers who believed they were effectively held harmless by the judgments of government-sanctioned rating organizations."

It's easy to have no sympathy for those who bought collateralized debt obligations only to learn they were filled with packing peanuts. And I don't. But stupidity wasn't these people's shortfall, to their credit. It was relying on the word of the ratings agencies -- Moody's (NYSE: MCO  ) , Standard & Poor's, and Fitch -- that told them everything was fine and well. And as Greenspan points out, ratings agencies are government-sanctioned entities, so competition for good, high-quality analysis gets stifled.

3. On regulating financial markets:

"In dealing with nonbanks that come in all varieties under the label of 'shadow banking,' it is probably best to regulate financial products rather than institutions."

Bingo. Don't simply regulate Goldman Sachs (NYSE: GS  ) . Its bankers will throw up smokescreens all day around regulators trying to decode its balance sheet. Start at the bottom and regulate (or ban) things like credit default swaps. The only way you'll outsmart these guys is to regulate from the bottom up, not the top down.

4. On "too big to fail":

"Federal Reserve research had been unable to find economies of scale in banking beyond a modest-sized institution."

Hear that, JPMorgan Chase (NYSE: JPM  ) CEO Jamie Dimon? Now quit acting like civilization will be forced back into hunting and gathering if four banks don't control the economy.

5. On crisis forecasting:

"Forecasters as a group will almost certainly miss the onset of the next financial crisis, as they have so often in the past and I presume any newly designated 'systemic regulator' will also."

I'm like my colleague Matt Koppenheffer on this one: The thought of risk-regulation committees and advisory boards makes me nauseated. Most regulators didn't even acknowledge anything was wrong until chaos was everywhere. And once you realize a bank such as Citigroup (NYSE: C  ) or Bank of America (NYSE: BAC  ) is in deep water, it's too late. You've got to install firm rules that prevent insanity in the first place, rather than rely on crisis committees or reactionary policies the way we did in 2008.

Ridiculous points
1. On the Fed's role in the housing boom: 

"The global house price bubble was a consequence of lower interest rates, but it was long-term interest rates that galvanized home asset prices, not the overnight rates of central banks, as has become the seeming conventional wisdom. … No one, to my knowledge, employs overnight interest rates -- such as the fed-funds rate -- to determine the capitalization rate of real estate ..."

If you assume everyone uses a 30-year fixed-rate mortgage, he's right. But how about the roughly one-third of borrowers in 2005 who used adjustable-rate mortgages linked to short-term interest rates set by the Fed? These borrowers represent some of the most egregious excesses of the housing boom, and they couldn't have done it without you, Al.

2. On the impracticality of controlling bubbles:

"At some rate, monetary policy can crush any bubble. If not 6 1/2%, try 20%, or 50% for that matter. Any bubble can be crushed, but the state of prosperity will be an inevitable victim."

Let's look at how this has played out in the past. Facing an inflation bubble in the early 1980s, Greenspan's predecessor, Paul Volcker, raised interest rates to 20%. That hurt for a while, but he's now considered an economic hero for doing it. Inflation collapsed, and real growth boomed. He looked past the short run to save the long run. Greenspan, on the other hand, let this bubble burn itself out. The result, in his own words, was "the most virulent global financial crisis ever." But we preserved prosperity in 2006, people, so apparently it was all worth it.

3. On choices: 

"Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible. Assuaging their aftermath seems the best we can hope for."

It's a bit dramatic to assume we can pick either crippling bubbles or central planning, but nothing else. You can simultaneously have dynamic free markets and common-sense rules that prevent pizza delivery guys from living like they're on MTV Cribs. We had something close to this from the end of World War II up until the late '90s. And it was awesome. Bubbles are a natural part of human behavior. That's a given. But it's pretty weak to just roll over and accept their wrath as inevitable.

What do you think? How responsible is Greenspan for the financial meltdown, and what should he have done differently? Let loose in the comment section below.

Be sure to check back every Tuesday and Friday for Morgan Housel's columns.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Moody's is a Motley Fool Inside Value and Motley Fool Stock Advisor selection. Motley Fool Options has recommended a write puts position on Moody's. The Fool has a disclosure policy.


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  • Report this Comment On March 23, 2010, at 4:06 PM, ridarod wrote:

    Morgan,

    Good article, thank you.

    On your last point "choices" I think you're right, and the only way to sanely exit this modus operandi is free banking. Check out Murray Rothbard's "The mistery of banking" which I think is available online for free. Easy read, well worth it.

  • Report this Comment On March 23, 2010, at 4:57 PM, medgul wrote:

    why in the world does anyone care what G says or supposes?

  • Report this Comment On March 23, 2010, at 5:16 PM, 7footmoose wrote:

    This is the Maestro's way of saying he had little or nothing to do with the financial meltdown. His policies of low and lower interest rates in an effort to delay or forever avoid any type of normal economic downturn were primary catalysts of the entire mess. No amount of rewriting history is ever going to exonerate him.

  • Report this Comment On March 23, 2010, at 5:17 PM, jdweitz wrote:

    Alan Greenspan was a gutless fed chairman whom is 50% responsible for the crisis since he is the one person who had enough power to do something but did absolutely nothing.

  • Report this Comment On March 23, 2010, at 5:19 PM, jimmybox wrote:

    In the early 1980s, commercial banks accounted for 70% to 80% of all the loans made in the United States; shadow banks accounted for the remainder. By 2008, the positions had reversed: 70% of the country’s total loans were either originated or held by shadow banks, leaving commercial banks with only a 30% share. The trend was pervasive: even large commercial banks had established shadow banking subsidiaries known as “structured investment vehicles.”

    The main difference between commercial banks and shadow banks is that commercial bank liabilities also function as money; shadow bank liabilities don't. So for the past 20-30 years, we had a massive increase in housing credit (largely provided by the shadow banks) with the attendant asset inflation. Nevertheless, consumer price inflation has been relatively muted because the growth in the money supply has not greatly outpaced real output. MV = PY

    The "Taylor Rule" that Greenspan references sets a target level for the fed funds rate based on inflation and GDP targets. So the Fed was sort of stuck in 2005: why should it raise rates in an effort to stop asset inflation if consumer prices were relatively contained?

    Personally, I think Alan's being a little disingenuous in that the real fed funds rate was still negative for a couple years (i.e., you lost purchasing power if you kept your cash in the bank). However, I think his point is valid in that it's very difficult (and perhaps, dangerous) to simultaneously fight asset inflation with the blunt instrument of the fed funds rate when you are experiencing only modest consumer price inflation. The simple fact is that asset bubbles aren't really that dangerous unless they're funded with a lot of leverage. That's why an $11 trillion decline in U.S. equity values from '99 - 02 produced minimal macroeconomic fallout while a $3 trillion drop in US housing prices caused total chaos.

    So while the Fed certainly bears partial culpability for the housing debacle, the real problem was freewheeling financial institutions (including Fannie and Freddie).

  • Report this Comment On March 23, 2010, at 5:23 PM, EquityBull wrote:

    Great article. Well thought out points and arguments. Let's hope Greeny reads this to understand a bit more

  • Report this Comment On March 23, 2010, at 5:29 PM, holosys wrote:

    It took 66 pages to spell the abbreviation C.Y.A.

  • Report this Comment On March 23, 2010, at 5:43 PM, mdrwolfe wrote:

    Greenspans defense of the Feds role or lack of control in setting long term interest rates, thereby providing it a pass in culpability for the housing fiasco is not worthy of the space given it...as you correctly stated, Volker traded short term interest rate turmoil for long term growth and productivity by helping squeeze inflation out of the system. All Greenspan had to do in 2002/2003 was to call a summit of key bankers (WAMU/BofA/Wachovia/Citi), investment bankers(GS/Lehman/BS/ML), key mortgage originators(Country Wide/Wamu),key insurance wrappers(MBIA/AMBAC/MGIC/AIG), and large investors (pension/mutual fund associations), and tell them we can deflate the housing bubble through immediate voluntary constraint on each of your parts, or I will protect the finanacial system from breakdown by using the Feds power to increase the bank reserve requirements to whatever level necessary to bring bank leverage down to levels that will effectively put all these sectors into negative growth modes...yes this would have caused a material slowdown in economic growth in the shortterm, but would have saved over a trillion dollars of bubble paper from ever being created,

  • Report this Comment On March 23, 2010, at 5:52 PM, jesse2159 wrote:

    MEMO TO : Alan Greenspan

    FROM: The Planet Earth

    SUBJECT: Current affairs

    Wendal Wilkie lost, the depression was really bad and while you were in a coma, the financial health of America had a melt dow.

  • Report this Comment On March 23, 2010, at 6:09 PM, PositiveMojo wrote:

    Greenspan clearly underestimated the risks of the subprime mortgage bubble. In his book, "The Age of Turbulence", page 233, he said, "I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk, and that subsidized home ownership initiatives distort market outcomes. But I believed the, as now, that the benefits of a broadened home ownership are worth the risk."

    There you have it! He embraced the subprime activity as a good thing.

    So - how responsible was Greenspan? According to the Federal Reserve Act he was directly responsible for "credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates". He was not successful and the credit run up between 2004 to 2006 during his watch was an abomination.

    With all due respect to Greenspan, his successor Ben Bernanke said that the housing market was cooling would have a soft landing in May of 2006. What both failed to see was the historic number of ARM loan resets in August of 2008. This was the beginning of default earthquake and was seen by Goldman as early as May 2008.

    However, the event in August 2008 could only have been stopped by Greenspan since these were loans that made during his tenure. Bernanke didn't realize he was stepping into a fire until it was too late.

  • Report this Comment On March 23, 2010, at 6:12 PM, shovel99 wrote:

    Great comments by all the Fools! I would only add that he did get right that Congress... under the thumbs of Barnie Frank and Chris Dodd... forced Fannie and Freddie to make Ninja Loans "No Income, No Job No Assets" ... and Clintonistas forced CRA on the Banks to people who couldn't pay. OF course he didn't name any names.. because you folks pointed out he owns about 50% of the responsibility.

    I would also add... End the Fed, the source of 80% of America's problems, as willing pawn of Congress and President.

    In the interim, would one of you bright Fools volunteer to put Pawn Beryankee out of work?

    shovel

  • Report this Comment On March 23, 2010, at 6:24 PM, jmsralnc wrote:

    Greenspan self-admittedly fashioned and maintained an air of mystique around his public persona--his studied style of obtuse argument, obscure cross-referencing, muddled catechization, and mordant tone, served as good cover for the fairly ruthless, even at times vicious (ask those who tried to sound the alarm), egoist behind the glasses. As well as that, it also served to stem and even crush valid criticism, which ultimately comprised trying to decipher Greenspan's excrutiating celebrations/lamentations.

    Based on the quotes in this article, if we read between the lines, which is a requirement when dealing with the practiced, manufactured inscrutability of Greenspan, then the politic, almost craven subordinate he has always been shows itself--he is now comfortable waving the party flag, taking swipes at the left, mitigating or willfully ignoring his and his faction's culpability, and, indeed, trying to rewrite history.

    It seems Greenspan got over the utter shock about the economic collapse he proclaimed to Congress and Americans, and now sees clearly--the opportunity, or rather his opportunity.

  • Report this Comment On March 23, 2010, at 6:52 PM, gdf55 wrote:

    When the economy could be controlled by simply adjusting interest rates, Greenspan rocked. I don't think there was anybody better at the art of it. That's not to say he didn't get it wrong, just he was better than most of his predecessors. He got it wrong big-time in the fall of 2000, for example, and I often wonder if his motivation might have been partly political. The timing was fortuitous.

    But it would also be helpful to remember that Greenspan also exercised some measure of control over things by simply talking about them. No one will ever forget "irrational exuberance," for example.

    So what went wrong? If all you have is a one-trick pony, it'd better be a darn good trick. And interest-rate setting was the Fed's one real trick. Its ability to control the pace of the economy faltered when short-term interest rates were overshadowed by the housing bubble, where normally sane people suddenly became convinced that any interest rate was OK because their homes would increase in value forever - and greedy lenders absolved themselves of responsibility for weeding out the bad risks because they were sure they could wrap the bad loans in better loans and sell the whole thing as a debt instrument.

  • Report this Comment On March 23, 2010, at 7:18 PM, mtracy9 wrote:

    This guy was a media darling back in the 1990s. No one seemed to notice that he was ignoring problems and that he had no interest in investigating dangerous financial practices, like credit default swaps. It seems Alan was too busy at the time reading his Ayn Rand and glorifying free, unregulated markets.

  • Report this Comment On March 23, 2010, at 7:28 PM, MotleyReader wrote:

    The Fed is greatly misunderstood. It is an NGO. It is self-serving, at the expense of the American tax payer. Don't believe that is possible? I found this appropriate article I encourage you all to read, entitled, "Who Owns The Federal Reserve?" by Ellen Brown. The tag line is "The Fed is privately owned. Its shareholders are private banks." I think you will find that piece quite enlightening. Read it here: http://www.globalresearch.ca/index.php?context=va&aid=10...

  • Report this Comment On March 23, 2010, at 7:42 PM, gunnboy wrote:

    Liberal congress trying to give home ownership to everyone even though they didn't have the means caused the housing bubble. Crazy competition (short term bottom line) among banks, morgage lenders, and credit agencies fed the irrational behavior of all.

    The ones in congress that are screaming the loudest were the biggest culprits (Barney Frank).

  • Report this Comment On March 23, 2010, at 8:44 PM, LessGovernment wrote:

    Another great article Morgan. Thanks.

    However, there is a name missing in the blame game.

    Fact:

    In 1990, the combined balance sheets of Fannie and Freddie were a very manageable 132 billion dollars. By 2005, the combined balance sheets had swelled to $1.5 trillion dollars, and by the end of 2007, the combined balance sheets had exploded under the lack of oversight provided by Congress to a completely ridiculous $5.2 trillion dollars or 3,939 % the 1999 level.

    When Fannie and Freddie found themselves in a deep hole, (liability from securities issued exceeded value of underlying mortgages) both Fannie and Freddie just kept on digging. Congress (idiots that they were and still are) simply gave the GSE's a bigger shovel through advantageous interest rates and the removal of effective oversight. Yes, the ratings agencies played a part, as did the mortgage originators that wrote the junk, as did Alan Greenspan. But one very big "cause" has been shielded by the media because he is one of the darlings of the media.

    It is very easy for one to practice revisionist history, and leave out that which is not politically correct, but to me, the death nail was the push to have Fannie and Freddie lower their credit standards and end up buying at high dollar from the originators what amounted to low value mortgages. Once that purchase was done, Fannie and Freddie were screwed. It is therefore my contention that Fannie and Freddie lost money, not because mortgages failed, but because they paid too much for the mortgages they bought.

    They paid for high quality mortgages and actually bought low value mortgages. This had nothing to do with ratings agencies because this was before securitization. This was just bad purchasing. I learned a long time ago in business that you make your profit when you buy your inventory, not when you sell it, and if you pay too much for it, your are screwed. And Fannie and Freddie were no exception to this rule. So the real question then becomes why did Fannie and Freddie pay too much for their "inventory"?.

    The answer is because they were told to, that's why. Fannie and Freddie were pushed into lowering their credit standards by Bill Clinton and Janet Reno. So if one is to stick to the facts, and not revise history to fit the politically correct posturing of the day, then the name Bill Clinton has to be high on the list of "major causes" of the housing/mortgage debacle right along side that of Alan Greenspan, Congress, the ratings agencies, and the loan originators. Read the article below from the NY times, the last great paper in our land and become more enlightened. My only question is how has Teflon Bill managed to escape blame from these actions?

    http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-...

  • Report this Comment On March 23, 2010, at 9:05 PM, AbleRich wrote:

    "Irrational exhuberance" was Greenspan's term. It was not limited in any way by the Bush Administration or the FED; in fact it was promoted by both. It snowballed and combined with OIL price increases and out-right fraud, Gov't spending increases for the wars without any increase in revenue or sacrafice by the American people were all reasons the bubble burst.

    Bubbles need to be prevented.

  • Report this Comment On March 23, 2010, at 11:44 PM, douggieboy wrote:

    On point # 2, Greenspan has hit the nail on the head, with one small omission.

    Congress tied the hands of Moody's, Bloomberg, and Fitch back in 1999, delegating absolute control of the lending industries, primarily that involving mortgages, to a pack of quacks out of MIT running a company we know of as Fair Isaac, or FICO [NO relation to FICA, which is Uncle Sam's Social Security tax.] Read about it on my website, www.ficovictims.com. I predicted all of what has transpired ten years ago, as described on that site, and links to Christine Baker's other sites, like Bayhouse.com and Creditforum.org~ [I believe there are others too, most of which I commented on using DougPratt, Douggieboy, or DPratt5546@aol.com as my handle.

    Fannie and Freddie going down, the blossoming of foreclosure toadstools across American landscapes, major bank failures, and a taxpayer funded bailout of the corporate greed-mongering which gave FICO the level of control it still enjoys to this very day.

    Two homes were foreclosed, and lost my entire life savings and net worth, because 15 years of perfect credit history was not sufficient to generate a FICO score allowing me to qualify for a normal, federally backed mortgage~~ for a dozen years I was kicked into sub-prime, by SOLE VIRTUE of the mysterious black box quackware score. Income, net equity, and loan to value ratios meant nothing. Wells Fargo had worked with me in the past, and WANTED to write my real estate notes, but was prohibited from doing so because of my FICO score, even at LTV of 60% or less. My interest rates skyrocketed, and after two years I was driven under.

    The big clearing houses had no choice in how their bond portfolios were to be represented to investors, foreign or domestic, because the entire system was handed over to [UN]FAIR ISAAC, lock, stock, barrel, and cart blanche for the banking industry to continue its rape and pillage of the American consumer, and put an end once and forever to the American Dream, as Congress had been bribed,,,,er.., I mean, lobbied, to keep the dirty mess going, and it's STILL GOING ON TODAY!!!

    I always respected Greenspan's excellence, in both economic matters, and social responsibility he made best efforts to exercise in a judicious and unbiased manner, given the degree of power he was entrusted to wield. If he ever knew about the FICO madness, I'm sure he was forbidden to discuss or disclose it, just as Moody's, Bloomberg, and Fitch were kept in the dark all the way along. I was screaming all over the Internet, wrote letters to Congress, public media, and camped out for days in the office of my Senator, Mike Capuano, as my house was being foreclosed.

    A second home on Cape Cod also went down, with three appraisals ranging between $1.58 and $1.73 M. I owed $940,000 on it, and was intending to sell once renovations were completed, this involving an extra $150,000. I never made it that far.

    Both banks who foreclosed on my properties in 2007 went belly-up in 2008. The first had granted a stay of execution, only to call at 8:30 PM the night before to tell me that some senior officer had decided to let it foreclose; the next morning a multi-millionaire bought it for $660,000; my last fee appraisal had come in at $1.125 M, and two brokers' CMA's [I'm also a realtor] were $1.05 and $1.130 M~~ I comped it out at $1.08 M. The buyer promptly evicted me, threatened to kill the pregnant wife of one of my best tenants, jacked rent up on the others, so only one stayed on. He lied in open court, and falsified settlement papers relative to the departure of the tenant he threatened, and had his exclusive agent write an affidavit, showing highly inflated figures, as to what the I occupied would rent for on the open market. After I was thrown out, it sat empty for a few months before he rented it for $250 less than the figure he presented in court, and at that only after he put about $10,000 worth of repairs and improvements into the place.

    Greed rules this once prosperous country of the free and the brave. Today, the American dream is a joke.

    The logo on my website depicts the front entryway to the Nazi concentration camp at Auscwitz/Birkenau. A few months ago, that infamous sign, "Arbeit Macht Frei," meaning "Works Sets [one] Free," in German, was stolen. Just last week I read on the Internet that it was recovered, and the thieves were convicted.

    IRONically, one of my best friends, a contractor from Germany, loaned me $200,000 of his own money to finish the project on Cape Cod, most of which had to cover my massively jacked=up mortgage payments, with a smaller portion being lost due to bad weather, and a subcontractor I caught stealing and had to fire.

    Of course, there was always that $600,000+ equity, buried in the back yard, not one nickel within reach, due to my FICO score. Today I live in a nasty, roach infested dump, with most of my income going out to another mega-rich property owner:-- 83 years old and he owns 77 units. I've asked him if he'd like to go out in a platinum casket, but while he caught the humor, that idea didn't interest him too much. I'll give credit where credit is due, by saying that he doesn't make a big fuss about me being a bit slow on the rent; the one who took my house at foreclosure is worth over $130,000,000-- and all I asked for was a $1,000 rent until I might find somewhere else to live. NFW. He still haunts my to this day, and on a final note, I'll mention that my elderly wife had Alzheimer's, and he kicked us to the curb 2 weeks before Christmas. Her cane went missing from the front hall one morning, and I doubt very much that anyone living upstairs is the one who may have taken it. Rot in hell, D.Y.

    And so life goes on in Amerika. No more dreams, no more hope; just additional wealth for greedy leeches, and despair for their subordinate hosts.

    Check out www.ficovictims.com. There you will find an excellent rendition of what greed can make of a man, a corporation, or even an entire country. I see no way out at this point:-- Congress has already sold out our nation's future, borrowing from principal down into the dirt. When that runs out the Federal Reserve is going to become insolvent, and the 1930's are like a cocktail ball in comparison of what's to come.--

    That's all folks---

    Sorry to say, from one American whose spirit has been shattered-----

  • Report this Comment On March 24, 2010, at 12:14 AM, goalie37 wrote:

    "Forecasters as a group will almost certainly miss the onset of the next financial crisis, as they have so often in the past and I presume any newly designated 'systemic regulator' will also."

    Are they really that hard to spot? And are they really that hard to spot when all you do for a living is look at economic data????

  • Report this Comment On March 24, 2010, at 12:18 AM, joewatts wrote:

    This continual Foolishness from Motley is tiresome.

    The Republican Party, the party of de-regulation, deliberately dismantled our government regulatory system and left his nation in total financial chaos.

    Let's put the onus right where it belongs ---- in the lap of the Republican Party and its right wing, ideological nutcakes.

    The Republican Party is the anti-government crowd and whenever it is elected that's what we get----no government.

    And what we got is the result of no government----except the disastrous invasion of Iraq which has bloated our debt.

    I will never subscribe to Motley again. I'm tired of this ideological baloney.

    Joe Watts

  • Report this Comment On March 24, 2010, at 2:54 AM, masterlessmaster wrote:

    What Goes Up MUST Come Down! One of the most

    disappointing things I learned as a little boy was that I could not throw a ball up in the air and it stay there!

    Alan Greenspan said that Real Estate had gone up for 250 years about 1800% and he expected it to go up another 1776% in the next 250 years. It didn't! It came down. He said, "I never expected it to come down!" At least that is what I heard him say. And that he expected that banks would act in their own self-interest, that is, honestly. As Bugs Bunny used to say, "What a MA-ROOOON!" Greed and selfishness are as common as crabgrass.

    Next I expect the dollar to go to zero and the economy to collapse. What will Al do then? Twiddle his thumbs. Who ever said that guy was a piccolo player anyway?

    Dan Russo

  • Report this Comment On March 24, 2010, at 3:10 AM, masterlessmaster wrote:

    No one is even talking about the 75% of the exploding mortgages that haven't hit the fan yet (which will hit in 2011 and 2013) or the 54 trillion dollars that the WW2 Baby Boom will need to pay for their Social Security. Not even Obama can wave his crystal ball and get us out of that one.

    We are in between Iraq and Afghanistan (a rock and a hard place). The world is a mess. South America has two conditions: terrible and extremely terrible.

    Africa has an AIDS epidemic and bloody wars. China has 1.5 billion people who are abysmally ignorant of what is going on in the rest of the world or even in their own country. Russia has oil but the people are suffering from the results of the Nazi invasion and its aftermath, the Nazi-induced Cold War (find the History Channel DVD, CIA and Nazis).

    Ronald Reagan turned this country into the biggest debtor nation on earth borrowing 4 trillion dollars in 8 years for the biggest military buildup in peacetime in world history. George Washington said in his Farewell Address that we should pay down the debts in peacetime that we incurred during wartime.

    Dwight D. Eisenhower said we Didn't Need a Big Military Budget in Peacetime.

    If we'd Secure Our Borders we wouldn't have so many millions of illegals here and so many terrorists.

    We shouldn't have imported SS and Gestapo to work for the CIA after WW2. (See Reinhardt Gehlen and his nazis for details, or look up Allen Dulles.)

    Hitler had a plan to keep fighting the USSR by creating a famine inside the USSR to starve 40 million Russians to death. The Nazis got in control of our NATO intel and lied to us all those years forcing the USSR to spend all of its money on military. KGB and Mossad helped it to collapse while Gorby was under house arrest by helping countries get immediate political recognition as soon as they left the USSR.

    CIA got us into Korea, Cuba and Vietnam which divided the country as much as the Civil War.

    What we have left is a country divided between fascists and their victims.

    Now watch the fascists try to reverse the reform we just passed into Law.

    Nazis are afraid of Laws like Vampires are afraid of Holy Water!

    Like Thomas More said, And when you cut down the forest of Laws, Richard, what will you do when the wind howls like the devil? What will protect you from the Devil?

    Answer: Nothing!

    Now is the Time for All Good Men to come to the Aid of their Country.

    These are the times which try men's souls.

    Throw the moneychangers out of the temple.

    Nationalize the banks like India did.

    What are we afraid of?

    We can do anything we can think of.

    Use your brains.

    Fear not for I am with you.

    Dan

  • Report this Comment On March 24, 2010, at 4:12 AM, TheKoz72 wrote:

    Ridiculous points #2 above about controlling bubbles gives praise for the actions to raise interest rates to control inflation. Well said. Unfortunately that option is lost as the amount of our short term debt in foreign hands effectively makes dollar operate the same way as the Euro. We cannot raise interest rates to fight inflation because in a very short period the necessary payments to foreign or external holders of the federal debt would exceed the total income of the country. This time we will have to use non-interest rate methods to fight inflation, such as import and price controls all of which will be destructive to our ability to pay the debt. I bet cheap dollars will be the answer and China will be pissed.

  • Report this Comment On March 24, 2010, at 8:56 AM, TMFBent wrote:

    @ shovel...

    "Congress... under the thumbs of Barnie Frank and Chris Dodd... forced Fannie and Freddie to make Ninja Loans "No Income, No Job No Assets" "

    I'd love to see some evidence for this interesting bit of historical revisionism. I suspect it will be hard to find.

  • Report this Comment On March 24, 2010, at 9:20 AM, bobbucy wrote:

    The causes of the housing collapse go far deeper than cheap interest rates, either short term or long term. The roots of this lie in the Community Reinvestment Act during the Carter administration. The law was largely unenforced during the Reagan and Bush Sr. years, but was revived under Clinton. Put simply, lending institutions were forced under threat of lawsuit to make loans that shouldn't have been made. And they were willing accomplices because Fannie Mae and Freddie Mac were "guaranteeing" everything. Bush Jr. and the republicans failed by not being more forceful in the warnings that they raised in 2005, which were summarily dismissed by Barney Frank. Efforts by the fed to artificially suppress lending rates do indeed have economic consequences, but I think that this has a lot more to do with government meddling in private lending to create a culture of bad loans.

  • Report this Comment On March 24, 2010, at 9:25 AM, LeonardChallenge wrote:

    The recent financial bubble was created by a combination of factors that are not spelled out in the article.

    It starts with politicians themselves. The Community Reinvestment Act was utilized to force Afirmative Action to the field of lending by arguing the banks were denying mortgages to blacks more often then to whites. Never mind that whites are turned down for mortgages more often then asians. Home ownership was magically transformed into an 'entitlement', another one of those 'basic human rights'.

    Liberal politicians and activists, and those of us stupid enough to listen, are also to blame. For decades 'Land conservations laws', whether in the form of 'open space laws', 'historical preservation laws', 'minimum lot size laws' etc has made building real state more expensive then it needs to be. It is precisely in places with strong 'land conservation' laws where the price of real state is some multiple of what it is where there are no such laws (compare the situation in the state of Texas to the state of California).

    There are others, too numerous to render it impractical to list here.

    PLEASE, I STRONGLY recommend to those of us who want to understand the complexities involved to read THOMAS SOWELL's recent book, "THE HOUSING BOOM AND BUST"

    http://www.amazon.com/Housing-Boom-Bust-Thomas-Sowell/dp/046...

  • Report this Comment On March 24, 2010, at 9:50 AM, Howard1ii wrote:

    I would add to his point #1, the role of Congress, in particular charactors like Barney Frank who pro-actively supported the activities of Fannie Mae, Freddi Mac.

  • Report this Comment On March 24, 2010, at 10:32 AM, jdawgwon wrote:

    Nice article Morgan, and point number one is the elephant in the room....

    ..."scary is there isn't a plan on what to do ... Functionally,

                  NOTHING HAS CHANGED SINCE THE y                                  COLLAPSE d."

    Any Foolish ideas in Fooldom for REAL change?

  • Report this Comment On March 24, 2010, at 10:59 AM, mpendragon wrote:

    The housing bubble was more complicated than low interest rates. It had to do with making loans for the purpose of collecting fees, packaging those bad loans up into mortgage-backed securities, and buying fake insurance (credit default swaps) backed by virtually nothing to make these things safe.

    Lenders weren't forced to make these loans, they were happy to do it during the housing boom because they could collect fees, often huge fees that were rolled into the loan, and quickly unload them. Investors were happy to buy them because they had a higher yield than CDs or money market accounts and rating agencies told them they were safe. Borrowers were happy to get them because for several years you could build equity with an interest only loan on a house that was nicer than you should be able to afford.

    Borrowers thought they were OK because houses were going up in value more that 10% a year in many markets so they could refi their crappy loans before their ARM adjusted. Lenders (which were more like brokers because they didn't keep the loans) thought they were OK because they sold the loans off packaged with aforementioned fake insurance. AIG and the other insurers and rating agencies thought they were OK because they didn't think a systemic failure was possible.

    The government's main failure is that they dropped the ball on regulating credit default swaps and they should have forced other institutions to keep more cash on reserve.

  • Report this Comment On March 24, 2010, at 11:33 AM, dcrednek wrote:

    Great article. I want to read the letter in its entirety now, as I'm sure many others will do as well. My perception of the former Fed Chairman has changed forever, from one of admiration to one of near disdane. Greenspan still refuses to accept any culpability for two crises during his watch (remember the tech bubble? hard to given that the real estate bubble made it look like spring training for the local t-ball league). Taking the excerpts of the letter at face value I'm left to wonder if the Former Fed Chairman has anything meaningful to contribute to this discussion.

  • Report this Comment On March 24, 2010, at 11:37 AM, none0such wrote:

    @TMFBent

    >>@shovel...

    >>"Congress... under the thumbs of Barnie Frank and >>Chris Dodd... forced Fannie and Freddie to make >>Ninja Loans "No Income, No Job No Assets" "

    >I'd love to see some evidence for this interesting bit >of historical revisionism. I suspect it will be hard to find.

    Maybe not evidence of forcing but certainly Frank was at the center of brokering deals between Republicans and regulation-minded Liberals.

    From Lexington, Economists, Mar. 26, 2009:

    A tale of two barons

    ...

    "Angry peasants have no shortage of manure to throw at the two men. [Barney Frank and Chris Dodd] have both received generous campaign contributions from the financial industries that they are there to regulate. And they have both enjoyed unusually close relations with the mortgage giants that helped to produce the current meltdown, Fannie Mae and Freddie Mac. Mr Frank resisted attempts by the Bush administration to shift regulation of the two bodies to the Treasury on the ground that they were “not facing any kind of financial crisis”. "

    ...

  • Report this Comment On March 24, 2010, at 12:26 PM, no12call wrote:

    After reading Ron Paul's, End the Fed, I discovered that Greenie was a actually a sound money man in the early 60's. It's amazing how quickly he changed his tune as he moved up the Fed ranks. It's pretty sad and pathetic that he became so convoluted in his own power that he ignored the simple common sense that a bunch of day traders and speculators came Blog about in their lunch hour. History will judge him as we do, a Judas.

  • Report this Comment On March 24, 2010, at 12:41 PM, ejazz2095 wrote:

    Alan Greenspan should be hanged!

  • Report this Comment On March 24, 2010, at 2:25 PM, memoandstitch wrote:

    So Greenspan is claiming that the Fed funds rate cannot cause any bubble but only stimulates the economy. Another BS from an economist.

  • Report this Comment On March 24, 2010, at 2:34 PM, TopAustrianFool wrote:

    "If you assume everyone uses a 30-year fixed-rate mortgage, he's right. But how about the roughly one-third of borrowers in 2005 who used adjustable-rate mortgages linked to short-term interest rates set by the Fed? These borrowers represent some of the most egregious excesses of the housing boom, and they couldn't have done it without you, Al."

    You are completely misunderstanding the low-rate role on the debacle. The incredibly low rates, couple to the restriction that this low rate borrowing could only be use for real estate, created an inflation that was greatly reflected in housing and indirectly, over time, in general prices. Because of this house prices grew, construction sky-rocketed and then investments by firms that create capital assets, like CAT and such, went up with it. This was malinvestment as the house prices, low interest rates were not a cause of increase savings, but of money creations. That's right, printing money. So the FED is the main culprit period. So the Bust is nothing but the liquidation of this malinvestments and toxic assets, which the govt has slowed by promising to bail out and buy the toxic assets. If the govt had said that there would be no bail outs under any circumstances, firms like CAT and the banks would have liquidated faster.

  • Report this Comment On March 24, 2010, at 2:37 PM, TMFHousel wrote:

    topsecretfool,

    How is that a complete misunderstanding? It doesn't look like we disagree on anything.

    Morgan

  • Report this Comment On March 24, 2010, at 2:37 PM, TopAustrianFool wrote:

    I meant to quote Alan above. Did not mean that Housel misunderstands.

  • Report this Comment On March 24, 2010, at 2:40 PM, TopAustrianFool wrote:

    "At some rate, monetary policy can crush any bubble. If not 6 1/2%, try 20%, or 50% for that matter. Any bubble can be crushed, but the state of prosperity will be an inevitable victim."

    Then what's the point Alan?!!! That's like saying if your head hurts the Doc can always get rid of your headache by cutting your head, unfortunately it may affect your cognitive abilities.

  • Report this Comment On March 24, 2010, at 2:48 PM, TopAustrianFool wrote:

    "At some rate, monetary policy can crush any bubble. If not 6 1/2%, try 20%, or 50% for that matter. Any bubble can be crushed, but the state of prosperity will be an inevitable victim."

    Really?!! Alan, Really?!!! Then what's the point Alan?!!! Then let the bubble burst and stop causing it!! That's like saying the if you suffer migranes that the Dr. can stop it by cutting your head off, but unfortunately this may affect your cognitive abilities.

  • Report this Comment On March 24, 2010, at 2:54 PM, TopAustrianFool wrote:

    "You can simultaneously have dynamic free markets and common-sense rules that prevent pizza delivery guys from living like they're on MTV Cribs."

    Ha ha... That's right... Reminds me of my sister who left a psychologist job to sell real estate. When you have all kinds of people moving into an industry just like that, and then living the rich life by peddling anything, you know something is being manipulated. I actually believe that channels like HGTV actually also sprung out that whole lunacy.

  • Report this Comment On March 24, 2010, at 3:10 PM, dstb wrote:

    Maybe if he had sat down and thought about this stuff when he was in power he might have been able to do something before the crash.

    No....actually he is too wired into the "cocktail party crowd" that was the cause of the problem. Politicians and bankers joined at the hip. He did not WANT to do anything. The Fed is FAR from independent and this guy is a joke. Dispand the Fed and Fannie Mae/Freddie Mac.

  • Report this Comment On March 24, 2010, at 4:19 PM, McCrikey wrote:

    The Fed was started to smooth out the business cycle. Instead it caused the worst crash since the Great Depression. Disband it now.

  • Report this Comment On March 24, 2010, at 4:28 PM, TopAustrianFool wrote:

    The "Business Cycle" is a figment of the Keynesian imagination.

  • Report this Comment On March 24, 2010, at 6:13 PM, DJDynamicNC wrote:

    "We had something close to this from the end of World War II up until the late '90s. And it was awesome."

    This is exactly right. We largely just need to put back the regulations we already had in place to give the market the stability it needs to function properly and provide for the real creation of real wealth from the real economy. 40 more years of relatively stable growth would do me just fine, thanks, and I don't care how much Goldman complains.

  • Report this Comment On March 24, 2010, at 8:52 PM, fockewulf wrote:

    Anybody interested in the Greenspan saga has got to check out this online documentary. All I can say is our country needs a hell of lot more people like Brooksley Born.

    http://www.pbs.org/wgbh/pages/frontline/warning/view/

  • Report this Comment On March 24, 2010, at 8:54 PM, fockewulf wrote:

    Anybody interested in the Greenspan saga has got to check out this online documentary. All I can say is our country needs a hell of lot more people like Brooksley Born.

    http://www.pbs.org/wgbh/pages/frontline/warning/view/

  • Report this Comment On March 25, 2010, at 7:26 AM, TopAustrianFool wrote:

    "We largely just need to put back the regulations we already had in place to give the market the stability it needs to function properly and provide for the real creation of real wealth from the real economy. "

    Can you give an example of a regulation that gave the market stability? Obviously you are too young to remember the 1970's.

    There was a ton of regulations in the 70's. An example is setting the price of oil. That brought us shortages. I think the prosperity you are refering to is the one that lasted 20 yrs and started in the mid 80's. During the last 10 yrs (mid 1990's to mid 2000's) of that, the govt and the FED were milking it and regulating like nuts. Low interest rates and inflationary policy is what brought the boom and subsquently the bust. Not low regulations.

  • Report this Comment On March 25, 2010, at 1:02 PM, jrj90620 wrote:

    Greenspan is responsible for keeping interest rates low.Bush and most other politicians thought home ownership was good for the country and liked easy money Fed and banks giving loans to anyone who asked.Homeowners loved the fact that their houses were appreciating.No one wanted to end the party.

  • Report this Comment On March 25, 2010, at 4:31 PM, neutrinoman wrote:

    Great article. I agree completely with your judgments of Greenspan's points. Too bad Alan didn't say these in, say, 2005, but hey :)

  • Report this Comment On March 25, 2010, at 8:04 PM, TopAustrianFool wrote:

    "Bush and most other politicians thought home ownership was good for the country and liked easy money..."

    Interesting how you mention most politicians, but couldn't help it to mention Bush by name.

  • Report this Comment On March 25, 2010, at 8:13 PM, plange01 wrote:

    greenspan being made a total fool out of by wall street and tricked into lowering rates to far was the main cause of the financial crisis.greenspan should be rotting in jail not talking...

  • Report this Comment On March 25, 2010, at 10:49 PM, tuxeroo wrote:

    Good article. Plenty of people and policies to blame, but it all goes back to foolish (note the lower-case "f") political and fiscal policies. Banks can't be too big to fail. Requiring lenders to make loans to people who can't afford to borrow, and putting America's full faith and credit behind the worthless paper that's created, may be good politics, but it's irresponsible verging on criminal. Regulators can't outmaneuver financial institutions bent on gaming the system for risky but quick gains with illusory assets like credit default swaps and bundled, worthless mortgages with worthless AAA ratings,but bogus "investment" vehicles can be banned and bogus ratings agencies can be defrocked. A nation can no more ignore the laws of economics than you and I can ignore the law of gravity. Where are Milton and Rose Friedman, now that we really, really need them?

  • Report this Comment On March 26, 2010, at 12:27 AM, rfaramir wrote:

    End the Fed. Period.

    "We largely just need to put back the regulations we already had in place to give the market the stability it needs to function properly and provide for the real creation of real wealth from the real economy. "

    IF you still want the curse of a central bank that has the power to inflate our wealth away and cause bubbles and busts, then regulating that bank (and all its member banks, i.e., the whole banking industry) is about the best you can get. You'll still have chaos and damage to the economy, but maybe a manageable amount, as long as you trust the regulators. (Oops, that doesn't work, either.)

    But that's an unnecessary "IF". Just ending it and returning to a metallic money and 100% reserve banking is the only way to prevent business cycles and the inflation that steals the purchasing power of every dollar we own.

  • Report this Comment On March 26, 2010, at 12:05 PM, 123scout wrote:

    Little Al's problems started long before the last crisis when he talked Regan into the market stabalization act.Then the LTC bailout. Then repealing Glass-Steagall. The lesson he still hasn't learned is that risk assets blow up from time to time and they need to. That's what makes them risk assets. He not only directed interest rates lower but flooded the world w/ dollars. With risk pushed out of the system why wouldn't the big boys lever up to the hilt and beyond? His ignorance and lack of spine will take years to fix. But it will take less time if the market fixes it than if the government tries. Let's hope Ben gets it.

  • Report this Comment On March 26, 2010, at 12:10 PM, modeltim wrote:

    I've always detested that man. Recently read Greenspan's Fraud by Ravi Batra. That sums it up!

    He will go down in history as something akin to the financial equivalent of Attila the Hun or Hitler, take your pick.

  • Report this Comment On March 26, 2010, at 12:12 PM, modeltim wrote:

    I've always detested that man. Recently read Greenspan's Fraud by Ravi Batra. That sums it up!

    He will go down in history as something akin to the financial equivalent of Attila the Hun or Hitler, take your pick.

  • Report this Comment On March 26, 2010, at 12:48 PM, INoFoolin wrote:

    The investment banks had no oversight. Financial sleight of hand by Masters of the Universe has trumped investment. Securitization of mortgages and the derivative insurance was not monitored. Greenspan said his Ph.D.s didn't understand the math behind these financial weapons of mass destruction. Hello..... The job of the Fed and the SEC are to understand, audit and regulate the markets. It turns out the Maestro was asleep at the wheel.

  • Report this Comment On March 26, 2010, at 1:53 PM, TheOthermfa wrote:

    I'm disappointed that Brooksley Born and her early and vocal warnings have been so universally ignored or buried in all these post-crash analyses. There are apparently so many rear ends that need covering that all the survivors just wish she would go away (she has, actually) and be wiped from the public memory. I, for one, wish there were many mor like her.

  • Report this Comment On March 26, 2010, at 5:20 PM, PeteGall wrote:

    Housels spin is more of the cynical Republican/Wall Street attempt to blame the meltdown on Fannie and Freddy. The greed of the banking and real estate industries , the regulatory cutbacks championed by the Republican congress under Bush , the greed of the ratings agency were the sources and they were able to bamboozle many Americans into believing in their ponzi scheme.

    In Bush's American nightmare the credit card offers came daily and the credit limits kept going up, the sales calls and print ads to refi and take cash out were relentless , the Mc Mansion subdivisions could not be completed fast enough, the gas guzzling cars were flying off the lots, if you had a house you could drive a Lexus. The luckiest thing that happened to me was my wife's job was going to be outsourced to India and we decided to sell our house and move to a less expensive area in 2005. People were falling over them selves to buy our 3 bedroom 1600 sq ft house at a price that was twice what we paid for it just two years ago. Those who created this greed bubble and those who enabled it still refuse to accept responsibility for it and are fighting the regulations that are coming. This is just propaganda in that fight.

  • Report this Comment On March 26, 2010, at 5:53 PM, MichaelZZ wrote:

    Regarding Mr. Greenspan, I have been writing since the middle 90's that he is, at best, an adequate economist with many shortcomings.

    I was always amused when our Congresspersons would suggest that when he dies, we should prop him up in a chair. What a blasphemous joke!

    In 1996, he uttered the now-infamous “irrational exuberance”, but did he and the Fed take any actions to mitigate the potential damages? No. His answer was that if the Fed were to raise interest rates, which would damage the economy, i.e., throwing the baby out with the bath water.

    What he failed to use were S.E.C. Regulations T (for securities brokers and dealers) and U (lending institutions). When he recognized the rampant speculative fervor, all he had to do was to increase margin requirements from 50% to 55% and that would have sent the appropriate signal to speculators. If 55% weren’t sufficient, he should have gone to 60% and so on, until the desired results were recognized.

    The concept is that more damage is done from a fall from the 22nd floor than from the 2nd floor, i.e., the NASDAQ would never has reached an apogee of in excess of 5,000.

    During the middle 90’s, he was in a quandary as to why we were experiencing greater inflation and wanted to “be in front of the curve’. Apparently, his calculations missed the efficiencies from technology and the competition of offshore labor. Ignorance is not always bliss.

    In early 1998, with inflation around 2%, he embarked upon a path to increase the Fed Funds rate to 6%, which was inane, at best, and more than likely political, given the upcoming 2000 elections.

    His “political” efforts worked as we began to sink in 2000. Bush, during his campaigning, suggested we were going into a recession.

    It wasn’t until after the election that Mr. Greenspan panicked and, beginning on January 3, 2001, precipitously dropped the Funds rates from 6% to 1% in about 8 months.

    His fear was deflation.

    His shortsightedness only put off the inevitable and severe economic morass.

    His fear was that if a $130M house would drop to $105M, it would place great stress upon the banking system. So, instead, he allowed that $130M home to rise to $400M and fall to $180M (remember the 22nd and 2nd floor concept?)

    The real estate crisis is a red herring and manifestation of the economics (and innate greed), not the cause of our poor economics.

    The cause of our poor economics is greed, i.e., Michael Douglas’ character, in Wall Street, was absolutely wrong when he said, “Greed is good”.

    There are many facets of our greed, but the two major are the shift of energies from the middleclass to the ultra-wealthy (top 0.1%) during these past 28 years (since John Hinckley) and the offshoring of jobs.

    Neither of these base problems have been addressed by our “leadership”.

    mz

    mikiesmoky@roadrunner.com

  • Report this Comment On March 26, 2010, at 6:02 PM, TMFHousel wrote:

    "Housels spin is more of the cynical Republican/Wall Street attempt to blame the meltdown on Fannie and Freddy."

    To be fair, I've never set foot on Wall Street, and donated money to, voted for, and continue to support Obama.

  • Report this Comment On March 26, 2010, at 6:10 PM, MichaelZZ wrote:

    CORRECTED: See "NOT" in 6th paragraph

    Regarding Mr. Greenspan, I have been writing since the middle 90's that he is, at best, an adequate economist with many shortcomings.

    I was always amused when our Congresspersons would suggest that when he dies, we should prop him up in a chair. What a blasphemous joke!

    In 1996, he uttered the now-infamous “irrational exuberance”, but did he and the Fed take any actions to mitigate the potential damages? No. His answer was that if the Fed were to raise interest rates, which would damage the economy, i.e., throwing the baby out with the bath water.

    What he failed to use were S.E.C. Regulations T (for securities brokers and dealers) and U (lending institutions). When he recognized the rampant speculative fervor, all he had to do was to increase margin requirements from 50% to 55% and that would have sent the appropriate signal to speculators. If 55% weren’t sufficient, he should have gone to 60% and so on, until the desired results were recognized.

    The concept is that more damage is done from a fall from the 22nd floor than from the 2nd floor, i.e., the NASDAQ would never has reached an apogee of in excess of 5,000.

    During the middle 90’s, he was in a quandary as to why we were NOT experiencing greater inflation and wanted to “be in front of the curve’. Apparently, his calculations missed the efficiencies from technology and the competition of offshore labor. Ignorance is not always bliss.

    In early 1998, with inflation around 2%, he embarked upon a path to increase the Fed Funds rate to 6%, which was inane, at best, and more than likely political, given the upcoming 2000 elections.

    His “political” efforts worked as we began to sink in 2000. Bush, during his campaigning, suggested we were going into a recession.

    It wasn’t until after the election that Mr. Greenspan panicked and, beginning on January 3, 2001, precipitously dropped the Funds rates from 6% to 1% in about 8 months.

    His fear was deflation.

    His shortsightedness only put off the inevitable and severe economic morass.

    His fear was that if a $130M house would drop to $105M, it would place great stress upon the banking system. So, instead, he allowed that $130M home to rise to $400M and fall to $180M (remember the 22nd and 2nd floor concept?)

    The real estate crisis is a red herring and manifestation of the economics (and innate greed), not the cause of our poor economics.

    The cause of our poor economics is greed, i.e., Michael Douglas’ character, in Wall Street, was absolutely wrong when he said, “Greed is good”.

    There are many facets of our greed, but the two major are the shift of energies from the middleclass to the ultra-wealthy (top 0.1%) during these past 28 years (since John Hinckley) and the offshoring of jobs.

    Neither of these base problems have been addressed by our “leadership”.

    mz

    mikiesmoky@roadrunner.com

  • Report this Comment On March 26, 2010, at 9:10 PM, RaiddinnRZ wrote:

    Greenspan is 100% at fault.

    If he weren't playing with fire, we would not all be getting burned right now.

    He thought he could use monetary policy to disrupt the normal economic cycle of

    expand, contract, expand, contract, expand, contract

    and change that to

    expand, expand, expand, expand, expand, expand

    we see how well that worked out.

    Thanks for nothing Greenspan.

    Nobody should look up to this charlatan.

  • Report this Comment On March 26, 2010, at 9:54 PM, ybckorea wrote:

    I'm impressed with the depth of knowledge of some of the fools. I tend to notice that the older ones seem to be factual while the younger ones seem to be political.

  • Report this Comment On March 26, 2010, at 11:17 PM, SkinnyLegsLikeLL wrote:

    Fools,

    Think about the cultural and human side of the origins of our predicament: Boom, bust, greed, and "irrational" exuberance are all part of ever-fallible and self-serving human behavior.

    I just cringe when I hear our political and financial leaders proclaim their zeal for "accountability" and "transparency". Does that mean that Greenspan, Rubin, Summers, and Geithner are going to actually admit and pay for what they did to the CFTC, Brooksley Born, and our economy?

    Greenspan is comfortably retired on income direct from the Treasury and Rubin is cashing in at a big bank. And we trust Summers and Geithner to fix the problem. RELAX! Accountability is here! The result is completely predictable and "transparent".

  • Report this Comment On March 27, 2010, at 12:03 AM, BFil wrote:

    The ARM mortgages were not the problem, as any UK borrower knows, until recently only flexible short term rates were available and you borrowed accordingly. It could be said that it is the fixed rate mortgage, that appears to protect you from economic movement, that encourages people to overcommit.

    I believe that the push came from the steadily increasing disintermediation of banking. I worked at that time in a climate of great concern. The best of your borrowers were leaving the bank borrowing market for the commercial paper and other direct borrowing markets. The markets were able to move further and further down in size (and probably quality) so there was no way to balance the lending to the smaller borrower, a more expensive and riskier market. The banks profitability were under intense pressure as capital adequacy and lack of fees or interest pressed in on them.

    So the arrival of a way to get your assets off the balance sheet (for capital rules purposes) and book fees was the "get out of jail" card that the banks had been searching for to revive their profitability. No wonder they went for it like homing pigeons.

    Initially the banks knew who these assets were sold to and it made sense as they were generally sold to solid overcapitalised deposit takers. It was when the next stage developed with split sales and traded debt packages that they (and everyone else) lost track of who was holding the risk.

    If we decide to regulate out any risk I think we will regulate out potential return and unnecessarily stifle the chance for credit to be placed where it is needed on the terms that are most suited to a particular user.

    Regulations currently bandied about will indeed flush away a lot of babies.

  • Report this Comment On March 27, 2010, at 11:12 AM, TopAustrianFool wrote:

    "voted for, and continue to support Obama..."

    You must love the FED then. Proxy control of industry and everything that moves, breaths, and crawls at one time or another is what Obama is all about.

  • Report this Comment On March 27, 2010, at 11:24 AM, TMFHousel wrote:

    topsecretfool,

    People who write choice words in ALL CAPS are hard to take seriously.

  • Report this Comment On March 27, 2010, at 11:27 AM, TopAustrianFool wrote:

    I wrote in all caps?

  • Report this Comment On March 27, 2010, at 11:30 AM, TopAustrianFool wrote:

    You mean Fed. I am not yelling. I am just automatically writing Fed as an acronym, rather than as short for Federal Reserve. That's just my brain.

  • Report this Comment On March 27, 2010, at 11:54 AM, TopAustrianFool wrote:

    Ok. You must love the Fed then. Proxy control of industry and everything that moves, breaths, and crawls at one time or another is what Obama is all about.

    It does sound more serious now.

  • Report this Comment On March 27, 2010, at 12:07 PM, TMFHousel wrote:

    What is FED an acronym for?

  • Report this Comment On March 27, 2010, at 12:38 PM, TopAustrianFool wrote:

    I said that I was writting it as acronym when it is not. It is just short for Federal Reserve Bank, or Fed Cairman. I was just doing it automatically, as if it was an acronym, but it is not. I recognize it was erroneous. But I am clarifying that I was not yelling.

  • Report this Comment On March 27, 2010, at 1:40 PM, plange01 wrote:

    greenspan by being tricked into lowering interest rates to ridiculous levels by wall street opened the door for millions of unqualified people to buy homes.this has put the US in a depression that has already caused more damage than anything else in the countrys history.greenspan will go down as one of the biggest foos ever and should spend the rest of his worthless life in jail......

  • Report this Comment On March 27, 2010, at 2:39 PM, LoneWolf888 wrote:

    Simply put: Why in the world would anyone care what this has-been hack has to say ? Superfluous to recount how this zero buried the country.

  • Report this Comment On March 27, 2010, at 2:57 PM, TMFHousel wrote:

    stockmarket10101,

    Yes, I'm aware. I just don't understand why so many insist in writing Fed in ALL CAPS. Whenever I ask why they do so, they say FED is an acronym. I still can't figure out what for. If they wrote FR for Federal Reserve, that would make more sense. For now, I'm sticking with these people just being nuts.

  • Report this Comment On March 27, 2010, at 4:05 PM, TopAustrianFool wrote:

    Hey, let's keep this sophisticated... I did not say that it is an acronym. I said that I am unconciously writting it as an acronym, but that it is not correct and not my intention. I think that it is a little arrogant and condecending to call someone a nut because of a grammar mistake. It is certainly disrespectful. You may want to get back to the point of voting and supporting blindly someone that is trying to do with Healthcare what the Fed, FR or what ever you want to call it, does with the economy. Which is Proxy control and not very free-market like.

  • Report this Comment On March 27, 2010, at 8:25 PM, jesse2159 wrote:

    Greenspan has always been a political, cocktail party hack. What he thinks is worthless. He failed to do his job and we are all paying for that slugs failings.

  • Report this Comment On March 29, 2010, at 6:58 AM, foolishfoible wrote:

    Thank you Morgan! Mr. Greenspan has over-reached again. The only way his argument makes any sense is if the Fed has absolutely no control over short term or long term interest rates. Assuming that this is his point. Then ask the obvious question for what purpose does the fed exist? Dump the Fed as a rate setter and maintain it as a regulator.

    He also appears to have absolutely no regard for or understanding of how equities are priced according to CAPM, where interest rates are critical for establishing the cost of capital. And clearly never understood the cross market in FOREX and the carry trade. It seems the one thing he does understand is his need for a legacy. History rightfully is treating him harshly.

    Now lets focus on the real causes of the crises low interest rates beget high leverage for individuals and financial firms and government incentives for home ownership lit the fuse of the bomb that eventually went off. If only we could control leverage....hmmm wasn't that under the Feds control also...margin requirements!

  • Report this Comment On March 29, 2010, at 7:02 AM, foolishfoible wrote:

    Oh and by the way...Why arent banks valuing their loans at market anymore? Transparency, pooh-bah. Were the banks to recognize those losses, earning in the S&P 500 would at best be 45 not the bs of 85 currently expected in 2010.

    So clarity has not returned to anything. Leverage is still too high, the government has a 80% market share of the mortgage market, and so few actually see that the cycle may have turned but the secular trend is still in tact.

  • Report this Comment On March 31, 2010, at 3:21 AM, hradni wrote:

    On the Federal Reserve system, it appears to me that the warnings from the John Birch Society and others has been correct all along. They've tried to tell us for decades. The denigration by the media and by academia of the sources of this information appears to me to plainly show why these things can happen under our noses. The whole truth doesn't come from the popular sources. The weasels like Greenspan are finally coming out, telling what they really think. There you have it ... Greenspan et al set up an unsustainable situation (and I don't let myself be fooled in believing they couldn't see the consequences of their action), and blame it on free enterprise, and conclude we must choose between unstable free dynamics (which was free only to be manipulated if we let them) versus "central planning". "Central Planning"? Sounds like words from a communist or fascist, doesn't it. That's where the real fight is. We citizens are not even in the fight. It is a fight between the dogs who want central planning of one flavor or the other flavor. The Fed Reserve needs to fail and control needs to come back to the people ...not toward a global equivalent of the Fed. That's what the centralists want is to take the mess they made to the global level. Ayn Rand was right that individualists are intrinsically more honest and right-dealing than collectivists. Let's not be confused that we must be Republican or Democrat -- both parties are led by central planning statists. The key to the power of these elitists is the Federal Reserve and their fiat tokens we call money. Let's determine a way to replace that corruption.

  • Report this Comment On March 31, 2010, at 3:47 PM, neutrinoman wrote:

    Actually, Greenspan is comprehensible and no longer emitting Greenspeak, now that he's out of power.

    There was always a large contradiction between Greenspan's theoretical beliefs (gold standard, laissez-faire) and his practice (bailing out banks and Wall Street at every turn). He rationalized it by writing (in his memoir) that in a welfare state, you have to either print money or inflate credit. He wasn't that blunt, but that's what he meant. He wrongly believed that, in an epoch of central bank manipulation of credit, private arrangements (like CDS) would alone be enough to counter the large financial risks created.

    Or, we could just abolish central banks.

    To Greenspan's concern about reserve requirements (at least everyone else shouldn't be able to create funny money! even if the Fed is allowed to!), I want to add a point about the time-maturity mismatch inherent in banking. Fellow Fool Mark Koppenheffer has examined this problem in terms of the repo and other arrangements that lead to large mismatches between long-dated lent-out assets and very short-term funding for higher-risk institutions. This is the very thing that killed Lehman.

    Perhaps there also needs to be a maturity spread limit or liquidity requirement, along with minimum reserve requirements.

  • Report this Comment On March 31, 2010, at 3:51 PM, neutrinoman wrote:

    foolishfoible is right: if central banks had only regulatory power, but no ability to create money or credit, almost all of this crisis would have never happened.

    Central banks could also keep a reserve to deal with crises -- that's what they did before 1914, without the ability to create credit or money on their own.

  • Report this Comment On April 01, 2010, at 10:06 PM, kejeff wrote:

    I think federal regulation overall lead to the collapse; Many parts that fell like a house of cards. I like the idea of regulating products and not institutions; ground rules that inhibit cheating, but do not get in the way of the free exchange. People invested with Madoff thinking the SEC had them covered (It didn't)- What happened to caveat emptor? Everything the government touches goes from sugar to sh**! Look out, the Progressives are building another house on a shaky foundation- more is coming: Regulating the auto industry, Health Care "reform", finance oversight, TARP, Jobs Bill, Cap and Trade, education overhaul, student loans, immigration "reform." Am I missing anything? Just a thought.

  • Report this Comment On April 04, 2010, at 6:25 PM, Glycomix wrote:

    Blame Schumer, Dodd and Franks who stoked the fire, not Greenspan who TRIED to put it out.

    2005 April 6, Greenspan WARNED

    - public didn't know Fannie's loans = worthless.

    - Fannie and Freddie at 23% of the market were producing 40% of subprime loans.

    Fannie's goals were set by "poverty stakeholders" at HUD which raised poverty loan goals.

    Greenspan hinted about problem in speeches in 2003-4 hoping that Congress would get the hint, but the press about it. was focused on Iraq.

    2005 April 4, Greenspan finally warned congress in public about Fannie and Freddie. Cut the GSEs from 23% of Mortgages($1.3 trillion) to 5% ($0.3 trillion) or they'll be a systemic risk .

    Subprime mortgages were toxic because they won't be repaid. With 23% of the market, Fannie pumped out 40% of subprime mortgages? No banks is capitalized at a higher level than 8%. This level of subprime mortgages could (and is) destroy the banking system.

    Schumer and the Dems became angry and fired Greenspan. who had 2 more years when he left in Jan 2006. They targeted the Republican Senators like dole who

    Franks & co. were addicted to pork because it got them re-elected. Schumer won by 71%. Dodd liked the idea of increasing the limits so much that he proposed increasing Fannie's exposure to the mortgage market from 76% to 100% as a plank in his presidential candidacy. See Bethany McClean's Dec. 1995 article about Fannie's pork.

    http://money.cnn.com/magazines/fortune/fortune_archive/2005/...

    FRANKS, SCHUMER AND DODD DIDN'T WANT FANNIE PROPERLY REGULATED.

    A regulator might cut their pork and payola.

    Slade and Washingtonian revealed the corruption behind Fannie and Freddie.

    Jim Johnson hired Asst. Atty Gen Gorelock for juice. She didn't know anything about finance. They bought Bob Benson by hiring his son to run the Utah brahch of Fannie Mae.

    http://www.slate.com/id/2200160/pagenum/all/#page_start

    Who else did Tammany Hall, oops, Johnson and Raines' Fannie and Mudd's Freddie, corrupt? They got Bennett to make the charge that OFEO administrator Falcone was predjudiced against Fannie's executives.

    Franks and Schumer pretended to be mystified when reporting irregularities were found and the Black Caucus harassed Falcone Fannie and Freddie's OFEO regulator, who had previously been a staff member of one of the Democratic members. http://www.youtube.com/watch?v=y4A0RuXhnQA

    Congress couldn't regulate the GSEs because Franks and Schumer were protecting them and using them for pork. Schumer and Dodd still are..

    The Washingtonian in 2002 revealed that Fannie and Freddie paid off staffers to report on Chris Shay's musings to a close about regulating Fanne and Freddie. http://www.washingtonian.com/articles/people/8593.html

    2007 May, St Louis Fed Governor William Poole revealed that the GSEs were bankrupt:

    $1.80 trillion in the red = $4.47 trillion liabilities- $2.67 trillion assets

    http://research.stlouisfed.org/publications/review/07/05/Poo...

    October 2007, they ignore and fired Poole, and Schumer Dodd and Franks threaten the OFEO regulator and Bush with the possibility of passing a law to increase Fannie and Freddie's portfolio.

    3. PORK- Schumer Increase Bank Failures by increasing Fannie/Freddie Subprime Exposure

    2007 Aug Schumer increases Fannie & Freddie’s “Investment Limit”

    http://voices.washingtonpost.com/washbizblog/2007/08/fannie_...

    2007 October Schumer want Fannie & Freddie to buy MORE subprime loans.

    http://money.cnn.com/2007/11/15/magazines/fortune/fannie_los...

    CONCURRENT EVIDENCE SUBPRIME = CAUSE OF BANK FAILURES

    - 2007October 19 Deutsch Bank reports $3 Billion in Subprime losses (a)

    - 2007 Nov 11 Deutsch Bank reports that 30-40 of Subprime loans will fail causing 40-50% losses

    (a)

    (b)http://www.cfo.com/article.cfm/10126890

    In August 2007, Dodd strongly suggested that caps be taken off of Fannie and Freddie.(1) Schumer also demanded that caps be taken off Fannie Mae so that they could buy more subprime loans, and promised to pass a bill if Bush and Lockhart didn’t take the caps off(2). Schumer opined at the Brookings Institute that subprime lending was sound. Dodd encouraged subprime loans.(4)

    (1) http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...

    (2) http://schumer.senate.gov/new_website/record.cfm?id=282215

    (3) http://jec.senate.gov/archive/Documents/Releases/12.19.07bro...

    4) http://dodd.senate.gov/index.php?q=node/4027/print

    2008 September 9

    guaranteed 76% of all mortgages, $5.3trillion in loans

    - 408% of what amount Greenspan said was “Too Much”

    http://www.c-spanvideo.org/program/281353-1 [37:00-38:50 (90 sec clip) in testimony]

    When asked, Lockhart said ‘Affordable Housing goals” caused Fannie and Freddie’s executives to guarantee unsafe loans. “HUD Goals were too aggressive”

    http://www.c-spanvideo.org/program/281353-101 [16:12-17:50]

    HUD required % of dwellings purchased GOALS for Fannie and Freddie

    TO: poor or moderate income: from 50% in 2000 to 56% in 2007

    Underserved housing loans: from 31% in 2000 to 43% in 2007

    Special Affordable housing: from 19% in 2000 to 27% in 2007

    SEE Tables 1& 2 on ‘Huduser’ (pp. 4-5)

    http://www.huduser.org/por©tal/datasets/GSE/gse2007.pdf

    5. Fannie Mae/Freddie Mac Bankruptcy- caused stock-market crash

    - because it required too many toxic mortgages

     Investors thought they were safe; so invested in Fannie Mae and Freddie Mac, Also known as Government Sponsored Enterprises (GSEs).

    Greenspan 6 April 2005 testimony: “Investors have too much confidence in the GSEs because they think it’s backed by the US treasury.”

    Stockbrokers recommended Fannie & Freddie were loans to veterans which were regulated by a

    ‘safe’ investment board with high fiscal standards. (My mother’s stockbroker thought so).

    That disappeared in the 1992. http://www.federalreserve.gov/boarddocs/testimony/2005/20050...

    Schumer prevents Fannie’s (Taxpayers) efforts to sell assets get solvent in the two citations below

    2009 July 20.http://www.crainsnewyork.com/article/20090720/FREE/907179966

    2010 Jan http://www.observer.com/2010/real-estate/schumer-weighs-stuy...

    Now: Who is at fault?

    A) Schumer, Franks and Dodd or (B) Greenspan and Poole?

    Group A increased subprime loans, while Group B tried to warn us.

    If you choose group B, are you an economist hired by O'Bama or is your uncritical view of Group A a reflex action?

  • Report this Comment On April 27, 2010, at 2:20 AM, emmurphy100 wrote:

    Regarding SELF regulation: Alan Greenspan testified on Oct. 23, 2008 before Henry Waxman, chairman of the House Oversight and Government Reform Committee. He said, "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that THEY were best capable of protecting their shareholders and their equity in the firms." ............"So the problem here is something which looked to be a very solid edifice, and indeed a critical pillar to market competition and free markets (self regulation) did break down. .......I still do not fully understand why it happened." Waxman pressed Greenspan: "In other words, you found that your view of the world, your ideology was not right. It was not working." "Precisely," Greenspan replied. "That's precisely the reason I was shocked because I had been going for forty years or more with very considerable evidence that it was working exceptionally well." - Taken from David Wessel's IN FED WE TRUST P.66 Mari Murphy - Retired Teacher

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