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The Roots of the Mortgage Crisis (Op-Ed by Alan Greenspan)
Wall Street Journal ^ | December 12, 2007 | Alan Greenspan

Posted on 12/12/2007 4:31:52 AM PST by RWR8189

On Aug. 9, 2007, and the days immediately following, financial markets in much of the world seized up. Virtually overnight the seemingly insatiable desire for financial risk came to an abrupt halt as the price of risk unexpectedly surged. Interest rates on a wide range of asset classes, especially interbank lending, asset-backed commercial paper and junk bonds, rose sharply relative to riskless U.S. Treasury securities. Over the past five years, risk had become increasingly underpriced as market euphoria, fostered by an unprecedented global growth rate, gained cumulative traction.

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 that was so prevalent in the Third World.

(Excerpt) Read more at opinionjournal.com ...


TOPICS: Business/Economy; Editorial; Government; News/Current Events
KEYWORDS: fed; federalreserve; greenspan; mortgage; mortgagecrisis; roots

1 posted on 12/12/2007 4:31:54 AM PST by RWR8189
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To: RWR8189

He’s got irrational exuberance on the brain.


2 posted on 12/12/2007 4:33:59 AM PST by P.O.E.
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To: RWR8189

So it was caused by the fall of Communism but not by greedy banks or people spending money they don’t have.


3 posted on 12/12/2007 4:34:13 AM PST by driftdiver
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To: RWR8189
Greenspan lowered rates to 1% so it was he who caused the mispricing of risk.
4 posted on 12/12/2007 4:36:30 AM PST by Vet_6780
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To: RWR8189

I could never understand the credit and intelligence so freely given to Greenspan over the years. If anything, he was always the last one to see when the economy needed tickering. But, like Hillary, they are the smartest people in the world, so what do I know?


5 posted on 12/12/2007 4:49:51 AM PST by moonman
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To: RWR8189
"The ability of central banks and their governments to join with the International Monetary Fund in broad-based currency stabilization is arguably long since gone. More generally, global forces, combined with lower international trade barriers, have diminished the scope of national government s to affect the paths of their economies."

The Europeans and the Chicoms are not going to like this. Maybe they'll get together, you know, for the benefit of both their people, the peasants.

6 posted on 12/12/2007 4:49:52 AM PST by Leisler (RNC, RINO National Committee. Always was, always will be.)
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To: RWR8189
Greenspan doesn't get it. The Politicians demanded that mortgages disparities involving minorities be reduced or the government would step in. The mortgage companies responded by giving sub-prime loans through means (ARMs etc.) that would allow these to "qualify".

The public, through the "Truth in Lending Laws", had to presented the total costs and the understanding of what adjustable rates would mean. But it seems a P.T. Barnum was right "A sucker is born every minute" and despite seeing the truth in front of their eyes (and the majority being government educated) they signed on the dotted line and thus created a Legal Binding Contract.

Now where the president and the congress think they can change a Legally Binding Contract is beyond me and I pray that the U.S. Supreme Court would throw out any legislation to do so, because it opens a legal Pandora's Box in the fact that the government could undo any legally binding contract from then on.

The solution, which has already started to be implemented, is to reduce interest rates and induce those with such mortgages to refinance onto a fixed rate. (A market instead of a Marxist fix).

7 posted on 12/12/2007 4:54:45 AM PST by sr4402
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To: sr4402

It’s bullshit to think that government policies caused this.

The banks are able to effectively dictate the cost of real estate based on the amount that they are willing to loan.

And as long as they were able to loan more and more, and the apparent value kept rising, it was a win-win proposition for all involved.

So, now that the values are vastly overstated, and the incomes are realized to be way too insufficient, and the risks have been pawned off to hedge funds, equities purchased by the Europeans, and small company retirement benefits packages, you think it’s the governments fault?


8 posted on 12/12/2007 5:05:26 AM PST by djf (Democracy means simply the bludgeoning of the people by the people for the people. Oscar Wilde)
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To: sr4402

The minority issue is the elephant in the living room. The government couldn’t stand to see minorities turned down for mortgages at a much higher rate than other groups so they pushed to even out those rejection rates. A lot of people got in over their heads. Now the government will push to even out the foreclosure rates. Equal outcome is more important than equal opportunity.


9 posted on 12/12/2007 5:16:03 AM PST by ladyjane
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To: djf

The government sets the lending standards and the banking regulations.

They deliberately loosened these standards and regulations in the second Clinton administration in order to increase the numbers of poor & minority people in their own homes. There was pressure on Fannie/Freddie to lower their portfolio standards. In fact, the Democrats’ obsession with “making housing affordable” led to the creation of Fannie/Freddie and the use of these two GSE’s as plum political appointments for their connected people in the banking system.

Yes, the government has a portion of the blame in this, as do the banks, the borrowers and the mortgage brokers.


10 posted on 12/12/2007 5:23:01 AM PST by NVDave
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To: RWR8189
Sir Alan the Arsonist gives a speech on fire safety. How laughable.

"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

11 posted on 12/12/2007 5:29:44 AM PST by Travis McGee (---www.EnemiesForeignAndDomestic.com---)
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To: RWR8189

Alan Green-SPAM...he should have stuck with the clarinet. LMAO


12 posted on 12/12/2007 5:37:42 AM PST by kellynla (Freedom of speech makes it easier to spot the idiots! Semper Fi!)
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To: NVDave
They deliberately loosened these standards and regulations in the second Clinton administration

Brilliant strategy and timing to insure an economic meltdown and landslide for Clinton II.

13 posted on 12/12/2007 5:41:22 AM PST by Vet_6780
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Pflr


14 posted on 12/12/2007 5:41:58 AM PST by crghill (Christianity...setting women free since 0 a.d.)
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To: RWR8189

He sure likes to talk alot in his retirement. He should change his name to ‘Greenspin’.

(Wish he would take up building ships in bottles or something.)


15 posted on 12/12/2007 5:45:24 AM PST by PBRSTREETGANG
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To: RWR8189
As I have noted elsewhere, history has not dealt kindly with protracted periods of low risk premiums.

What's mispriced is the potential effects of the economic meddling of blowhard central bankers.

16 posted on 12/12/2007 5:56:08 AM PST by Moonman62 (The issue of whether cheap labor makes America great should have been settled by the Civil War.)
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To: Vet_6780

He also encouraged folks to go for the adjustable rate mortgages (ARM’s) a month before they where going to do their interest rate rise for the next 2 years. He knew what they where going to do and why they where going it, yet encourage people to go into ARM’s. Non of this is coming as a surprise to him, its just CYA. Mr. Bubbles helped created the stock market bubble of the 90’s and this current housing bubble. To be fair, he is not the only one to blame, as our congress critters where there threatening to take the FED’s power away in the 90’s after the irrational exuberance speech, which Greenspan quickly caved on. This is what happens when you institutionalize mediocrity and economics, it’s all political and not about doing the right thing for the long term betterment of the country.


17 posted on 12/12/2007 8:08:22 AM PST by DarkWaters
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To: P.O.E.
He’s got irrational exuberance on the brain.

No doubt.

"...insatiable desire for financial risk came to an abrupt halt as the price of risk unexpectedly surged."

Unexpectedly? What planet has be been living on?

Why is it that I'm not surprised that the FED chairman was so incredibly out of touch?

18 posted on 12/12/2007 8:30:44 AM PST by zeugma (Ubuntu - Linux for human beings)
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To: RWR8189

What a shame that this guy retired. He is brillant. He was so unappreciated while a Fed Chairman. I believe some FREEPERS didn’t like him, but I bet they miss the heck out of him now. He might be one of the best government workers in history.


19 posted on 12/12/2007 8:33:40 AM PST by napscoordinator
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To: zeugma

Why is it that I’m not surprised that the FED chairman was so incredibly out of touch?

I agree with you. This guy we have now is miserable. Do you think it is too late to beg Greenspan to come back.


20 posted on 12/12/2007 8:35:34 AM PST by napscoordinator
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To: Vet_6780

I don’t think that anyone could have predicted the synergistic combination of loose credit standards, the repackaging of sub-prime debt into CDO/CMO/SIV’s, mark-to-model valuations, the co-opting of the three debt rating agencies and leverage greater than 10:1 on these instruments.

In all fairness to Clinton, his administration was responsible for only the first rung on the ladder. The financial industry did the rest to themselves.

The news coming out this morning from the finance industry shows a general climate of malfeasance on the part of bank/finance CEO’s all across the financial sector. I’ve never seen such a contagious case of the stupids in my life.


21 posted on 12/12/2007 8:37:29 AM PST by NVDave
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To: DarkWaters
He also encouraged folks to go for the adjustable rate mortgages (ARM’s) a month before they where going to do their interest rate rise for the next 2 years.

Where did he do that? You have a quote?

22 posted on 12/12/2007 8:52:14 AM PST by Toddsterpatriot (What came first, the bad math or the goldbuggery?)
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To: napscoordinator

Did you intentionally leave off the / sarcasm, or are you serious?

BTW, if you WERE serious....he wasn’t a govt employee. The Federal Reserve is a private banking institution. It is NOT part of the U.S. govt.


23 posted on 12/12/2007 8:55:10 AM PST by Travis McGee (---www.EnemiesForeignAndDomestic.com---)
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To: Travis McGee

That is interesting. I thought the President picked them. I just made so much money during his tenur that I like the way he handled the job.


24 posted on 12/12/2007 9:00:08 AM PST by napscoordinator
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To: NVDave
I don’t think that anyone could have predicted the synergistic combination of loose credit standards, the repackaging of sub-prime debt into CDO/CMO/SIV’s, mark-to-model valuations, the co-opting of the three debt rating agencies and leverage greater than 10:1 on these instruments.

I blame the securities investors who, in their stampede to spend cheap liquidity provided by the carry trade, failed to apply due diligence to the ratings agencies by drinking their KoolAid.

25 posted on 12/12/2007 9:09:18 AM PST by Vet_6780
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To: Toddsterpatriot

Greenspan says ARMs might be better deal
http://www.usatoday.com/money/economy/fed/2004-02-23-greenspan-debt_x.htm

Fed chief pushing ARMs
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2004/03/02/BUG275BONF1.DTL

http://themessthatgreenspanmade.blogspot.com/2007/10/alan-greenspan-on-arms-in-2004.html

Remarks by Chairman Alan Greenspan (actual speech text, referenced item is just before his conclusion)
http://www.federalreserve.gov/boarddocs/speeches/2004/20040223/default.htm

Do a search, you will find all kinds of articles for and against this when it first came out, I just picked some of the first ones to come up.

You also have to take into consideration that they, the FED, was signaling before they raised rates that they where going to do so which they did June 2004. As far as I can tell or remember there was no retraction to this ‘suggestion’ to lenders and lendees.

Of course now Greenspan is trying to distance himself from this, well he has been doing this since late July of this year I believe or some time not long after that which is when the subprime was just starting to show its head to the public.


26 posted on 12/12/2007 9:45:58 AM PST by DarkWaters
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To: Vet_6780

Yes, I agree — in part.

The ratings agencies have plenty to answer for, tho. Many investors, esp. those running muni or state funds, have these stupid plug-n-chug ideas of which bonds to buy. So along come these ratings agencies, all spouting top-shelf ratings of these CDO’s and other MBS synthetic debt securities, and many of the elected treasurers or similar political money managers just look at the rating, look at the higher-than-average return and they say “Sure, let’s buy some.”

Still, anyone with some financial experience should look at anything with a AAA rating on it and know that if it isn’t US government-backed debt, or one of the seven AAA-rated US companies, then that dog ain’t huntin’.


27 posted on 12/12/2007 10:05:01 AM PST by NVDave
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To: DarkWaters
One way homeowners attempt to manage their payment risk is to use fixed-rate mortgages, which typically allow homeowners to prepay their debt when interest rates fall but do not involve an increase in payments when interest rates rise. Homeowners pay a lot of money for the right to refinance and for the insurance against increasing mortgage payments. Calculations by market analysts of the "option adjusted spread" on mortgages suggest that the cost of these benefits conferred by fixed-rate mortgages can range from 0.5 percent to 1.2 percent, raising homeowners' annual after-tax mortgage payments by several thousand dollars. Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.

The above is the proof for your claim, "He also encouraged folks to go for the adjustable rate mortgages (ARM’s) a month before they where going to do their interest rate rise for the next 2 years. He knew what they where going to do and why they where going it, yet encourage people to go into ARM’s"?

Really?

28 posted on 12/12/2007 11:35:14 AM PST by Toddsterpatriot (What came first, the bad math or the goldbuggery?)
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To: djf
They are all to blame. The Fed was too loose for too long, panicking over the stock market crash and early WoT. The banks lent recklessly, and the Wall Street masters of the universe threw out decades of sound finance for their spreadsheet innovations. Foreign mercantilists goosed trade by buying reams of USTs and kept out long rates low, doing so. They also refuse to let their developing peoples consume as their incomes have risen. US households aren't saving, and instead are irresponsible with debt.

Every single link goes wonky, and it all goes comprehensively smash, and they are all to blame, and we will all pay. Blame is so irrelevant anyway.

The one item in the article that is Stalinist-surreal, is the developing world saving 33% of income - while the richest on earth, like us, save nothing. It is utterly crazy to have that division, and it cannot possibly last.

The other item that stood out is the claim that long rates being so low are a proof that investment can't keep up with savings desires. This is manifest nonsense. Savings are due to desire in places like China, they are policy. And long rates are low because every central bank on earth is inflationist. If low rates really reflected low demand, then gold and oil prices would be weak, not galloping. Low rates reflect a uniform policy of excessive looseness by all central banks, together.

The normal check on one country being too loose is that its currency weakens. But when everybody does it, commodity prices soar instead.

29 posted on 12/12/2007 12:28:33 PM PST by JasonC
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To: JasonC
Sorry, should read "savings are not due to desire in places like China, they are policy". The point being, the governemnt does not allow the people to make their own consumption decisions, when it monopolizes foreign exchange.
30 posted on 12/12/2007 12:30:35 PM PST by JasonC
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To: napscoordinator

The U.S. President “picks” the chairman of the private Federal Reserve, from a very small list of choices put up by....the private Federal Reserve.

It’s a fig leaf.


31 posted on 12/12/2007 1:08:54 PM PST by Travis McGee (---www.EnemiesForeignAndDomestic.com---)
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To: Travis McGee
from a very small list of choices put up by....the private Federal Reserve.

It's private? Who owns it?

32 posted on 12/12/2007 1:23:16 PM PST by Toddsterpatriot (What came first, the bad math or the goldbuggery?)
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To: JasonC
Stalinist-surreal, is the developing world saving 33% of income - while the richest on earth, like us, save nothing

A heartfelt "AMEN" to that.

The Depression is no longer part of the memory of living Americans, and we are not the better for it.

We will finally be out of the twilight zone when "consumer spending up" is not considered as good an indicator as "consumer savings up".

33 posted on 12/12/2007 3:15:07 PM PST by Notary Sojac (Bring Back Paul Volcker!!)
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To: napscoordinator

check my tagline for a contrary opinion


34 posted on 12/12/2007 3:16:21 PM PST by Notary Sojac (Bring Back Paul Volcker!!)
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To: ladyjane
The minority lending was part of the issue, but not the biggest part by far.

Lots of white people with $50K incomes "bought" $500K houses, and millions of white people used their houses as ATM machines.

35 posted on 12/12/2007 3:19:09 PM PST by Notary Sojac (Bring Back Paul Volcker!!)
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To: Toddsterpatriot

Are you serious, TP? You didn’t know that the Fed was a private institution, composed of its private member banks?

Wikipedia, for speed.

The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. The Federal Reserve System, created in 1913, is a private banking system composed of (1) the presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils.

The Federal Reserve System was established in 1913 by the enactment of the Federal Reserve Act. Currently, Ben Bernanke serves as the Chairman of the Board of Governors of the Federal Reserve System.


36 posted on 12/12/2007 4:45:17 PM PST by Travis McGee (---www.EnemiesForeignAndDomestic.com---)
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To: Travis McGee
Are you serious, TP? You didn’t know that the Fed was a private institution, composed of its private member banks?

But who owns it? You make it sound like the government has no influence, no power over the Fed, because it's privately owned.

37 posted on 12/12/2007 5:22:25 PM PST by Toddsterpatriot (What came first, the bad math or the goldbuggery?)
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To: Toddsterpatriot
That last sentence contradicts itself, which is a pretty good trick, even for you.

See if you can analyze your own writing, and get back to me when you can make sense.

38 posted on 12/12/2007 5:24:30 PM PST by Travis McGee (---www.EnemiesForeignAndDomestic.com---)
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To: Travis McGee
So you won’t tell me who owns it? LOL!
39 posted on 12/12/2007 5:26:48 PM PST by Toddsterpatriot (What came first, the bad math or the goldbuggery?)
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To: Travis McGee
and get back to me when you can make sense.

You first.

The Federal Reserve is a private banking institution. It is NOT part of the U.S. govt.

LOL!

40 posted on 12/12/2007 5:28:36 PM PST by Toddsterpatriot (What came first, the bad math or the goldbuggery?)
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