Irwin Stelzer for the Times Online totally blows it with his analysis of the housing collapse. The headline Search for a scapegoat finds Greenspan sums it up nicely.
WITH investors having lost the odd trillion in recent weeks, the hunt is on for a scapegoat. Washington pundits are not famous for their kindness to politicians, regulators and other out-of-power figures to whom they no longer crave access. So it should come as no surprise that Alan Greenspan has been nominated as the culprit, and that the process of chipping away at the pedestal on which he stands has begun.
The first attack on Greenspan was one of those indirect, by-implication-only assaults in which government officials specialise. William Poole, president of the Federal Reserve Bank of St Louis, used a speech to property professionals to unburden himself of some thoughts on the nonprime mortgage market.
That market, Poole pointed out, matters to the Fed because of the importance of the housing industry to the overall economy, and the Fed’s regulatory responsibility for banks and practices in the mortgage market. He therefore finds it “odd” that the Fed and lenders did not realise that low interest rates in the 2002-4 period could not be maintained. Yet sub-prime borrowers were encouraged to take out adjust-able-rate mortgages (ARMs), many of which are now in default as a result of higher interest rates, leaving a trail of foreclosures and creating chaos in the market for mort-gage-backed securities.
What does all this have to do with Greenspan, who is nowhere mentioned in Poole’s rather elegant anal-ysis?
Greenspan’s main point was that “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage”. That has been the case, as Poole points out: “The bottom line is that more people have access to mortgage credit now than ever before . . . Despite its limitations and flaws, the nonprime market has served a large number of borrowers very well.”
Speaking of elegant anal-ysis that is exactly what Irwin Stelzer is guilty of. Where is the proof that access to mortgage credit has served a large number of nonprime borrowers well? One look at record numbers of foreclosures, should be enough to prove otherwise. Better yet let’s see a percentage of those who benefited vs. those who didn’t. Where’s the analysis?
With that, inquiring minds just might be asking: “Mish it sounds like you are arguing with the free market. What kind of libertarian are you anyway? Didn’t the free market create those products?”
No, the free market did not create those products. Those products came about largely because …..
- Greenspan slashed interest rates to 1%.
- Bush promoted an “Ownership Society”.
- The HUD subsidized loans to those who could not afford them.
- Congress created Fannie Mae and Freddie Mac under misguided policies to make housing affordable. Those policies backfired.
- Tax breaks promoted housing.
- The Fed let speculation get out of hand.
- The Fed does not believe in popping asset bubbles but does believe in bailing out banks and lending institutions in the wake of popped asset bubbles. This creates a moral hazard and promotes speculative lending.
None of the above has anything to do with free market forces. Nor does the housing bubble itself. Thus the questions I asked Irwin Stelzer earlier are in practice moot. So what if “many” benefited from those lending practices. I believe more were harmed. But whether or not some select few (or many as Irwin Stelzer thinks) benefited from those policies is irrelevant.
What matters is that inflation benefits those with first access to money (banks, brokerage houses, etc). By the time mortgage standards were low enough for everyone to partake in the boom, the boom was nearly over. That makes these bubble blowing polices of the Fed, Congress, and the administration morally corrupt and that is why the Fed should be abolished and that is why Ron Paul should be elected. And finally that is why Irwin Stelzer is guilty of elegant anal-ysis. Greenspan is not a scapegoat. Greenspan, Bernanke, and the Fed, in conjunction with inane Congressional and Bush Administration policies is the problem. Implementation of free market strategies with a sound currency backed by gold as the constitution stipulates, in conjunction with sound fiscal policies by Congress is the cure.
Mike Shedlock / Mish/