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By Peter D. Schiff
Guest Columnist
Money Morning
Back during the U.S. invasion of Iraq, when the U.S. government issued its now-famous deck of playing cards featuring pictures of the 52 arch villains of the Iraqi police state, Saddam Hussein's face adorned the Ace of Spades. If the Barack Obama administration wanted to engage in a similar public relations campaign - this time with a focus on the U.S. real estate crisis - that top card should be reserved for former Federal Reserve Chairman Alan Greenspan.
In a speech before the National Association of Realtors last Tuesday, Sir Alan "the-bubble-blower" Greenspan claimed that his low-interest-rate policies in the early and middle years of this decade had no effect on mortgage rates or real estate prices. As a result, he claims no responsibility for the subprime mortgage crisis. But even current Treasury Secretary Timothy F. Geithner - who shared interest-rate-policy responsibility as governor of the New York Fed during the Greenspan regime - recently admitted that overly accommodative policy helped inflate the bubble. So what does Greenspan know that everyone else doesn't?
Greenspan's primary defense is that mortgage rates were a function of long-term interest rates that were simply not responding to the movement in short-term rates, which he did control. While it is true that the flow of capital from foreign creditors with excess dollars did keep long rates low despite rising short rates, this "conundrum" was not the leading factor in the housing bubble. Although rates on 30-year-fixed-rate mortgages are based on long-term bonds, by 2005 such loans had become an endangered species. The housing bubble was all about adjustable-rate mortgages (ARMs) with teaser rates of one to seven years - which are primarily based on the benchmark Fed Funds.
The rock-bottom teaser rates, permitted by the 1.0% Fed Funds rate, were the primary reason that many homebuyers were able to qualify for mortgages they couldn't otherwise afford - which, in turn, enabled them to bid U.S. home prices up to "bubble" levels. By pushing down the cost of short-term money, the U.S. central bank enabled homebuyers to make big bets on rising real estate prices. Without the Fed's help, few borrowers would have "qualified" for these risky mortgages and real estate prices never would have been bid up so high.
Greenspan expresses exasperation now, as he did then, that his careful nudging of interest rates higher by quarter-point increments did not translate into corresponding increases in long-term rates. Unfortunately, according to Greenspan, the markets would not cooperate with his wise guidance, and to his dismay, mortgage rates fell despite his best efforts.
As they say in Texas, that dog just won't hunt. If the "measured pace" of his quarter-point rate hikes were too slow to produce the desired effect, why didn't Greenspan jack up the pressure? With interest rates far below the official inflation rate for so many years during the bubble, he certainly had plenty of room to maneuver. The claim that he was unhappy with the ultimate results of his rate hikes - despite his having done nothing to adjust that policy - is ridiculous.
In addition to his colossal errors on interest-rate policy, there were many other ways Greenspan blew air into the real estate bubble. One example was what the market called the "Greenspan put." By creating the perception in word and deed (that has since proven accurate) that the Fed would backstop any major market or economic declines, lenders became more comfortable making risky loans.
In an often-quoted 2004 speech, Greenspan went so far as to actively encourage the use of adjustable-rate mortgages and praised home-equity extractions for their role in contributing to economic growth. In fact, rather than criticizing homeowners for treating their houses like ATM machines, he often praised the innovative ways in which such homeowners were "managing" their personal balance sheets.
In short, Greenspan was as much a proponent of leverage for homeowners on Main Street as he was for bankers on Wall Street.
The bottom line is that Greenspan fathered the housing bubble and now he refuses to acknowledge kinship with his wayward child. His denial of responsibility is an act of stunning bravado, and is a testament to his ability to turn even the simplest of situations into an impenetrable tangle of theories and statistics.
"The Maestro" easily trumps the private sector jokers who now hold top dishonors in our pack of economic villains. The fact that Greenspan still has any credibility shows just how little understanding the general public - including Wall Street and the media - actually has about this crisis.
[Editor's Note: Peter D. Schiff, Euro Pacific Capital Inc.'s president and chief global strategist, is a well-known author and commentator, and is a periodic contributor to Money Morning. Schiff is the author of two New York Times best sellers: "The Little Book of Bull Moves in Bear Markets," and "Crash Proof: How to Profit from the Coming Economic Collapse." For a more-detailed analysis of the nation's financial problems, and the inherent dangers that these problems pose for both the U.S. economy and for dollar-denominated investments, click here to download Euro Pacific's new financial-research report, "The Collapsing Dollar: The Powerful Case for Investing in Foreign Securities."
In the midst of an ongoing financial crisis that's eradicated trillions of dollars in shareholder wealth, the profit search facing U.S. investors is tougher than ever. The uncertainty surrounding the economic-stimulus and banking-bailout plans isn't helping. But a special new offer from Money Morning is a two-way win for investors: A free report provides insights into the threats those plans pose, while our monthly newsletter, The Money Map Report, consistently spotlights some of the hard-to-find but potentially lucrative profit plays that remain. Investors who subscribe to the Money Map Report can obtain a complimentary copy of Schiff's best seller, "Crash Proof," in which he details the causes of the housing bubble and financial-system collapse, and tells investors how to dodge losses from the problems that are still to come. To read our free report, and to find out more about this special offer, please click here.]
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Wikipedia:
Saddam Hussein's image on the Ace of Spades. -
Wall Street Pit:
Former Fed Chairman Alan Greenspan on the Economy. -
Wikinvest:
Subprime Lending. -
Wikipedia:
Economic Bubble. -
UrbanDictionary.com:
That Dog Just Won't Hunt. -
Amazon.com:
Greenspan's Fed And The American Boom.
Bubbles Greenspan and Ole Pres Clinton were the culprits…read this article from Sept. 30, 1999 when Clinton was president….
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: Thursday, September 30, 1999
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.
"Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements," said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. "Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market."
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
"From the perspective of many people, including me, this is another thrift industry growing up around us," said Peter Wallison a resident fellow at the American Enterprise Institute. "If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry."
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.
Comrade Greenspan is very much the problem. He jacked up rates at first for the wrong reason. He wanted to put the brakes on the hot stock market and crashed the economy. It seems to me if he wanted to let the air out of the market he could have changed margin requirements and accomplished his goal. People think Mr. Greenspan is so smart that they can't interpret what he is saying. More to the point, he is a babbling senile old fool that no one should pay any attention to what he has to say.
I was in the audience 10 years ago when Investment Director Keith Fitz-Gerald fabulously referred to Greenspan as a zero. He's been spot on for long before that cheeky fellow Schiff came on the scene. History will show that Greenspan did more to undermine the future credibility of the world's financial system than any single player during his time in office beginning in the mid 1990s when he refused to exercise the authority Congress explicitly gave him to crack down on the beginnings of the lending mess that has so spectacularly blown up in our faces today. And then again during the process leading up to the Commodity Futures Modernization Act of 2000 which removed reporting requirements for derivatives.
My hypothesis is that the Federal Reserve policy for the past thirty years was created as the result of a bet between Alan Greenspan and L. Ron Hubbard. http://is.gd/Bm3c
Mr Greenspan overviewed the merge between two bankrupted financial institutions, Morgan and Chase that were exposed at the time for more than 13.5 trillion dollars in derivatives out of total market of 21,0 trillions! Innocent move…?
Anyone of his stature who cannot speak clearly is either a fool or in the pay of unsavory forces. The corporate owned media always made fawning comments at his incomprehensibility as if words less soiled by the common herd somehow elevated the speaker. I referred to him as Greenspook as did some of my friends. We were a minute constituency on Wall Street where people nearly drooled at the mention of his name. Time cometh to us all.
TAX FREE SALE OF YOUR PERSONAL RESIDENCE:
Why is it that no one ever writes about or talks about our legislators. In the 90's a tax law change went into effect that I feel had as big an effect as any of this interest rate talk. As an accountant I remember when you could only exclude the gain from the sale of your personal residence once and only if you were over 55 years of age. When the law changed to any age and it could be done every 2 years the price of housing immediately started going crazy. This law change was a direct handout to the building industry which has made big winners and big losers. One more example of tax policy for political payback.