The Roots of the Mortgage Crisis (Greenspan Speaks!)

Wall Street Journal ^ | 12 December 2007 | Alan Greenspan

[shrinkermd]

...The crisis was thus an accident waiting to happen. If it had not been triggered by the mispricing of securitized subprime mortgages, it would have been produced by eruptions in some other market. As I have noted elsewhere, history has not dealt kindly with protracted periods of low risk premiums.

The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall. Following these world-shaking events, market capitalism quietly, but rapidly, displaced much of the discredited central planning...

...especially China, replicated the successful economic export-oriented model of the so-called Asian Tigers: Fairly well educated, low-cost workforces were joined with developed-world technology and protected by an increasing rule of law, to unleash explosive economic growth. Since 2000, the real GDP growth of the developing world has been more than double that of the developed world...

...The value of equities traded on the world's major stock exchanges has risen to more than $50 trillion, double what it was in 2002. Sharply rising home prices erupted into major housing bubbles world-wide, Japan and Germany (for differing reasons) being the only principal exceptions. The Economist's surveys document the remarkable convergence of more than 20 individual nations' house price rises during the past decade. U.S. price gains, at their peak, were no more than average.

...I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own. There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century.

[shrinkermd]

Interesting, succinct article that is hard to excerpt. I hope WSJ puts into public domain. In the meantime, I only had 300 words.

I was surprised at the Chairman's conclusion that is underlined above.

[samtheman]

Which one of his books is he pedaling today?

[Doogle]

posted 10 mins ago

[Ditto]

in some ways reminiscent of the Dutch Tulip craze

[phs3]

Actual Link...

http://opinionjournal.com/editorial/feature.html?id=110010981

[palmer]

We will never know whether the temporary 1% federal-funds rate fended off a deflationary crisis, potentially much more daunting than the current one.

He is insane.

[Vigilanteman]

Greenspan is the most over-rated Fed Chairman in history. He had brought us:

1. Two major stock market crashes with ill-timed comments.
   
2. Ushered in a recession by raising interest rates far faster and more sharply than the mild inflation rates at the time would have warranted.

He is fortunate that decent fiscal policy (thanks to a Republican administration and a Republican congress) dulled the impact of his two market crashes and well-timed tax cuts likewise dulled the impact of his recession.

But he still hasn't learned to keep his piehole shut. Indeed, his ego is so big he may be incapable of doing so.

[Earthdweller]

In a nutshell..our homes and all of our stuff are not raising in value like they have in the past because of the leveling effect with the Asian nations. Welcome to globalization.

And the boomers said, "Why is everybody always picking on me?"

[Travis McGee]

Sir Alan The Arsonist gives his thoughts on fire safety. How charming.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

~~Ludwig von Mises

"If recession should threaten serious consequences for business (as is not indicated at present) there is little doubt that the Federal Reserve System would take steps to ease the money market and so check the movement."

---Harvard Economic Society, October 19, 1929

“Several brokerage houses tumbled; blue-sky investment companies formed during the happy bull market days went to smash, disclosing miserable tales of rascality; over a thousand banks caved in during 1930, as a result of marking down both of real estate and of securities; and in December occurred the largest bank failure in American financial history, the fall of the ill-named Bank of the United States in New York.”

~~Only Yesterday: An Informal History of the 1920’s by Fredrick Lewis Allen

[Travis McGee]

The crisis was thus an accident waiting to happen. If it had not been triggered by the mispricing of securitized subprime mortgages, it would have been produced by eruptions in some other market. As I have noted elsewhere, history has not dealt kindly with protracted periods of low risk premiums.

"Of course, my fingerprints are not all over the last protracted period of low risk premiums. No, not me!"

[Travis McGee]

There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century.

Anybody care to speculate on what followed those crashes?

[Earthdweller]

Don’t say the D word. We will wash your mouth out with soap.

[Santiago de la Vega]

Greenspan is an incompetent liar.

He knows the problem was caused by the Fed raising the Funds rate, and he’s trying to cover up his own mis, mal, and non-feasance.

There is no reason to control the stock of money by meddling in the markets. They only do it so they’ll have something to do each day.

This is the last vestige of price control in the US economy and it must stop.

[Earthdweller]

Bubbles...Bubbles. I see bubbles everywhere. They are filled with air, and we don't care.