Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Best and Brightest Protect Greenspan and Betray the American People

Politics / US Politics Apr 12, 2010 - 05:42 PM GMT

By: Fred_Sheehan


Best Financial Markets Analysis ArticleAlan Greenspan's reputation has a whiff of terminal decline after his appearance on April 7, 2010, before the Financial Crisis Inquiry Commission (FCIC). Prudence is warranted though, before taking a short position on the former Federal Reserve chairman. The celebrated central banker has spent a lifetime pouring his deep reservoirs of energy and ambition into his own advancement, and now, his legacy.

The pillars of respectability find common ground with Greenspan. Not having foreseen the meltdown of the western world, of what use are they? So, the universities and think tanks offer Greenspan a podium to play the part of scholar even though he makes less sense than Crazy Guggenheim.

Three weeks before his FCIC appearance, Alan Greenspan addressed the Brookings Institute (on March 19, 2010). He presented a 48-page paper, "The Crisis." The title was one of the few honest statements of the day. Greenspan exonerated himself from any blame for The Crisis. It would serve little purpose to address his misstatements, most of which are either absurd or had already been shown to be self-serving fabrications. [See Panderer to Power]

It is worth reviewing the process by which preposterous ideas drain through the establishment sieve and calcify. Greenspan's most glorious success in this respect was on June 17, 1999, when he told Congress: "[B]ubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong. Betting against markets is usually precarious at best." For that hallucination, the economics profession (such as it is) awarded him the Greenspan Doctrine. [For a review of this episode, See February 11, 2010, blog Alan Greenspan: Party Boy

Times have changed. His audience's net worth is no longer tethered to Greenspan's serial bubbles. He could be dismissed, as should be the case, as an unctuous failure. He should be denied a distinguished podium that confers respectability. The Brookings Institute, a prestigious think tank, lent its valuable brand name to the man most responsible for the housing wreckage and who has demonstrated his incapacity to tell the truth since the denouement. The authority of established institutions is in steep decline and stronger moral fiber is required for those that survive.

Greenspan told Brookings' invited guests, who should chide themselves for contributing to the speaker's credibility, that short-term interest rates did not contribute to the housing bubble. The man-who-should-be-too-ashamed-to-appear-in-public stated the absurd: "To my knowledge, the lowering of the federal funds rate nearly a decade ago was not considered a key factor in the housing bubble." (The federal funds rate was cut from 6.5% in 2001 to 1.0% in 2003.)

What was not absurd was deceitful: "[I]t appears the decision to buy homes preceded the decision of how to finance the purchase. I suspect (but cannot definitively prove) that a large majority of home buyers financing with ARMs [adjustable-rate mortgages] were ARMs not being offered (during that period of euphoria), would have instead funded their purchases with 30-year fixed rate mortgages. How else can one explain the peaking of originations of ARMs two years prior to the peak in house prices (exhibit 18). Market demand obviously did not need ARM financing to elevate home prices during the last two years of the expanding bubble."

If the Brookings Institute graded papers, Greenspan deserved the dunce cap. Exhibit 18 conforms to his claim. The chart shows adjustable-rate mortgages peaking at a volume of $250 billion per quarter in early 2004 (data from the Mortgage Bankers Association). It does not show, nor does the Old Pretender mention, that in today's Dust Bowl sections of the country, the volume of adjustable-rate mortgages climbed after 2004. ARMs rose from 2% of mortgages in California in 2002 to 47% in 2004 to 61% in 2005.

It was Greenspan's speech on February 23, 2004, that stripped him of trustworthiness when discussing housing. On that date, he sounded like a shill for the National Association of Homebuilders when he claimed "[m]any homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages over the past decade."

The reason adjustable-rate mortgage growth slowed in 2005 was a matter of affordability. By 2005, over 20% of Californians who bought houses in the previous two years had devoted over one half of their earnings to mortgage payments. Adjustable rates no longer affordable, the interest-only (IO) and negative amortization (NegAm) share of total U.S. mortgage originations rose from 6% in 2003 to 29% in 2005. (Negative amortization mortgages allow the borrower to decide whether or not to make a payment each month. If no payment is made, the principal rises.) Exhibit 18 does not show IOs or NegAms (the line would have looked like a rocket launch), nor, are the terms "interest-only" or "negative amortization" used in the 48-page paper.

Not that Greenspan was unaware of them. Adjustable-rate mortgages in decline, Greenspan pitched these new innovations in a September 2005 speech before the American Bankers Association Annual Convention: "The menu [!!! - Editor's note], as you know, now features a long list of novel mortgage products, not only interest-only mortgages but also mortgages with forty-year amortization schedules and option ARMs, which allow for a limited amount of negative amortization." The consequences of Alan Greenspan cling to us like barnyard odor: $134 billion of Greenspan-sanctioned NegAm loans will be reset this year, and 93% of NegAm borrowers have only made the "minimum payment," meaning, the mortgages will be reset at higher than 100% of the original principal. (Standard & Poor's Research, November 2009)

In this speech he also praised piggyback mortgages and HELOCs [home equity lines of credit] used as piggyback loans: "Highly leveraged home purchasers tend to use so-called piggyback mortgages; that is, second liens originated at the time of purchase." In the next sentence, Greenspan showed he was as familiar with current mortgage subtleties as the highest producers at Countrywide Credit: "These loans are popular, in significant part, because they avoid the non-deductible private mortgage insurance payments required on larger, single loans." Greenspan then told his listeners he was not "worr[ied] that homebuyers are especially exposed to reversals in house prices." If any banker present had doubts about making zero-equity home loans, the nation's top banking regulator had just expressed approval.

Alan Greenspan told the FCIC on April 7 that he warned about the housing bubble in 2002. (This is the same man who has been saying nobody could have predicted the housing bubble.) To prove his point, the worst equivocator since Pinocchio quoted from a Federal Open Market Committee (FOMC) meeting that year. From page 5 of his prepared Statement to the FCIC: "our extraordinary housing boom...financed by very large increases in mortgage debt, cannot continue indefinitely."

First, Greenspan uses ellipses rather than include the most compromising phrase of that sentence: "and its carryover into very large extractions of equity". Second, Greenspan completely misrepresents his intent. He was pleased in 2002 that Americans were cashing out home equity and spending it, but was worried this boost to the economy might be coming to an end. For full, compromising statements made by Greenspan at 2002 FOMC meetings, see April 8, 2010, blog: Greenspan Came Not to Save Consumers but to Bury Them.

We would all benefit if "The Crisis" had received a hostile rebuke from economists. The Great Collapse mystifies the American people. The characters involved and characterizations of their contribution are debated without resolution. But in the case of Alan Greenspan, not only his contribution but also his methods of deception have been catalogued and published. His continued presence as after-dinner speaker, television guest, and party-circuit celebrity in Washington is an affront and insults the American people. "The Crisis" was an opportune time for economists to make amends for their silence during the housing bubble. Maybe the FCIC undressing is the beginning of the end, but a sustained effort is required to quash Greenspan's attempts to upgrade his tattered legacy.

Instead, the most respected academics grovel before their betters and demonstrate their submissive loyalty. Greg Mankiw, Professor of Economics at Harvard University, past chairman of President George W. Bush's Counsel of Economic Advisers, and author of internationally acclaimed college textbooks, opened his review of "The Crisis" with the official interpretation: "This is a great paper...."

By Frederick Sheehan

See his blog at

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

© 2010 Copyright Frederick Sheehan - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in