Thursday, April 8, 2010

Greenspan Knew Everything, Did Nothing

By John F. Wasik


Just for the record: Alan Greenspan knew about the housing/debt bubble and did nothing to prevent it from bursting.

Not only did he know how the bubble was inflating, but how Wall Street and Americans took advantage of it to buy real estate in a mass frenzy.

On top of that knowledge, he had documented how homeowners were looting their false wealth through home-equity loans – tapping whatever illusory dollars they could after two stock-market crashes in a decade.

The home-equity story is rarely told. Yet it was Greenspan who actually wrote a paper for the Fed in 2006 at the height of the bubble quantifying how much Americans were taking out of their homes to buy boats, cars, vacations and yes, more real estate. I profiled this free-for-all in my book on the housing crash The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

Greenspan also documented that Americans were becoming dangerously overleveraged – it was a long-term trend -- and were heading over the cliff during the bubble years.

In a paper he co-authored with Fed economist James Kennedy, they noted “since the mid-1980s, mortgage debt has grown more rapidly than home values, resulting in a decline in housing wealth as a share of the value of homes.”

The home price mania convinced millions of homeowners that the bubble years were the prime time to borrow against the over-inflated values of their homes. Home-equity loans accounted for four-fifths of the rise of home mortgage debt since 1990, Greenspan’s paper stated.

It’s often easy to blame consumers in this whole mess. After all, why did they get in over their heads? Nobody was forcing them to leverage up. With the onus of the American Dream and “maestro” Greenspan’s cheerleading to take advantage of cheap credit, Americans were following a script. “You can have that dream home and everything else now – just sign on the dotted line!” Real estate agents, bankers, builders and mortgage brokers all read from the same cue cards. “Get as much house as you can afford! You won’t have to pay it off for a long time. Why wait?”

The massive borrowing, unfortunately, meant Americans were becoming poorer in a real sense. If another recession came, which it did after the bubble exploded, they’d be in no shape to revive the consumer-dominated economy. Hence our anemic economic recovery, allegedly underway.

That’s why Greenspan’s testimony on April 7 before the Financial Crisis Inquiry Commission sounds like a snake-oil salesman insisting that his products and sales pitches were always legit.
Greenspan’s flaccid response to a question on why he didn’t do anything to stop the financial carnage?

"When you've been in government for 21 years, as I have been, the issue of retrospective and figuring out what you should have done differently is a really futile activity," Greenspan said, "because you can't, in fact, in the real world, do it.”

How about at least admitting that predatory mortgage lending was a huge problem, which the Fed knew for years? How about saying that it was the Fed’s job to police debt securitization and they dropped the ball? And why didn’t the Fed just raise interest rates when it was clear that cheap money was blowing up another bubble?

As for his recent amnesia as to how big the bubble was at the height of the mass delusion, here’s Greenspan from a May 21, 2005, New York Times piece:

"Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern," Mr. Greenspan told the Economic Club of New York at the Hilton New York hotel in Midtown.

In his typical argot, the Fed chairman would only admit that he saw some “froth” in the mortgage markets, while completely missing the blitzkrieg that would nearly take out the global financial system in 2008 and leave some of the major players like Goldman Sachs, Citi and Bank of America virtual wards of the state while taxpayers bailed them out.

"Even if there are declines in prices," Greenspan said in 2005, "the significant run-up to date has so increased equity in homes that only those who have purchased very recently, purchased before prices actually literally go down, are going to have problems."

As Greenspan morphs into the Neville Chamberlin of finance, let’s move on. Break up the biggest banks and deep-six the “too big to fail” doctrine. Create transparent, regulated markets for derivatives and toxic debt. Let homeowners who were damaged by the bubble write off their mortgages in bankruptcy to equalize the $12 trillion in help from American taxpayers.

What Greenspan knew for certain is that the financial monsters who benefited from his bubble would have his back when he retired to the lecture circuit and write his memoir.

Let history record that when Greenspan fully exits public life, he should be recognized for what he neglected to do and his misdeeds go far beyond sins of omission. Just ask the millions who are trying to claw back into the middle class.

John F. Wasik is an author, columnist and speaker. His Cul-de-Sac Syndrome profiled the housing bust.

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