The Roots of the Mortgage Crisis (Op-Ed by Alan Greenspan)

Wall Street Journal ^ | December 12, 2007 | Alan Greenspan

[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.

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.

[Toddsterpatriot]

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?

[Travis McGee]

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.

[napscoordinator]

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.

[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.

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.

[DarkWaters]

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.

[NVDave]

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’.

[Toddsterpatriot]

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?

[JasonC]

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.

[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.

[Travis McGee]

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.

[Toddsterpatriot]

from a very small list of choices put up by....the private Federal Reserve.

It's private? Who owns it?

[Notary Sojac]

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".

[Notary Sojac]

check my tagline for a contrary opinion

[Notary Sojac]

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.

[Travis McGee]

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.

[Toddsterpatriot]

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.

[Travis McGee]

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.

[Toddsterpatriot]

So you won’t tell me who owns it? LOL!

[Toddsterpatriot]

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!