April 7, 2010
Greenspan’s Not So Great Rewrite Continues
Greenspan is, once again, trying to defend his legacy and to rewrite history. Mr. Greenspan now says:
“If the Fed as a regulator had tried to thwart what everyone perceived as a fairly broad consensus that the trend was in the right direction, homeownership was rising and that was an unmitigated good, then Congress would have clamped down on us.” Reuters
So, in order to preserve the Fed’s independence Greenspan had to cater to Congress? Someone seriously needs to lock this man up.
“There's a presumption that the Federal Reserve's an independent agency, and it is up to a point, but we are a creature of the Congress and if ... we had said we're running into a bubble and we need to retrench, the Congress would say 'we haven't a clue what you're talking about'"
Why does Greenspan care what Congress – which has allowed the Fed to do anything it wants since Greenspan left – thinks about him? Moreover, is there a sane person on this planet that really believes for one second that Congress would have done anything if the Fed had tried to regulate the markets and/or adopt policies to slow the housing bubble?
Regardless, the most troubling part of Mr. Greenspan’s testimony today was when he praised former Fed governor (and now deceased), Edward Gramlich, who Greenspan said he had great respect for and was the authority on predatory lending. Mr. Greenspan insinuated during today’s Q&A (waiting for the transcript) that had Gramlich approached the board of course he would have taken his advice.
Pardon me for being blunt, but senility has clearly taken over if Greenspan says he would have listened to Gramlich. To begin with, Gramlich says that he brought the issue of predatory lending to Greenspan sometime in 2000 and that Greenspan is the one who stopped him from bringing these matters in front of the board. Moreover, this quote – from Greenspan –sits in direct contradiction to Greenspan’s attempt to rewrite history:
“For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it's not clear to me we would have found anything that would have been worthwhile without undermining the desired availability of subprime credits.” June 2007
In other words, back in 2007 Greenspan wasn’t so sure that he would have done anything differently even if Gramlich had stalked him day and night, but during today’s Q&A session he says he would definitely have listened to Gramlich if he had presented his insights to the board.
How many other Gramlich stories have never been reported? How many other back-room discussions never saw daylight because of Greenspan?
Finally, every time someone questions Greenspan about interest rates his ‘savings glut’ nonsense continues to strike a nerve. Greenspan’s alleged effort to raise interest rates in 2004 for the betterment of mankind is completely false. Moreover, the argument that raising short term rates had little effect on long-term rates because of the savings glut, while true, does not say anything about the importance of borrowing/lending spreads (i.e. there comes a point if the Fed continues to raise interest rates that the long-term rate loses its relevance as lenders tighten standards or stop lending to compensate for tighter spreads). Had Greenspan really wanted to slow the housing bubble down and/or ensure tighter lending standards, he could have done both of these things by raising short term interest rates beyond the ‘measured’ ¼ point nonsense that he informed Wall Street about well in advance.
Incidentally, how many times during his tenure did Greenspan surprise anyone with a rate hike (or hike beyond what was expected)? My memory says never.
“I overstate it, but the traditional method of making small moves has in some sense, though not completely, run out of psychological gas. Every time the interest rate goes up by a small amount [bankers] say okay, we'll raise the prime rate. Whatever you do is inadequate -- you, the Federal Reserve -- and we'll go along. We have access to liquidity at a fairly fixed federal funds rate -- the rate isn't going to change all that abruptly -- and you're not having much impact on market thinking or on market confidence in your ability to keep the money supply under control.” Volcker October 1979
Volcker was the most hated man on Wall Street when he took over. Congress, who also hated Volcker, dare not touch him. During his tenure Greenspan was loved and cherished by nearly everyone, especially Wall Street. This is all that is required to confirm that Greenspan didn’t, and still doesn’t, have a clue...