Last Wednesday, former Fed chairman, Alan Greenspan, testified to Congress about his involvement in the financial wreck that we’re still living through.
Greenspan was question about his decisions and whether those contributed to the bubble burst. Through out his testimony, Greenspan refused to admit any responsibility or even allow that the Fed’s action may have been at least contributory to the creation of the housing and banking bubble. In fact, after being pointedly questioned about whether the Feds policy of keeping interest rates low for a historically long time, despite increasing economic activity, Greenspan deflected the accusation. Rather than the Fed, Greenspan pointed his long bony finger to Freddie MAC and Fannie MAE claiming that they were the cause of the bubble.
Without a doubt, Freddie and Fannie were major factors in the housing collapse. Without doubt, loaning into the marginal nth of home buyers drove prices up while creating even more risk in the loans that were allowing those purchases to take place. However, equally without doubt is that a key enabler for this activity was the historically low rates that Greenspan’s Fed maintained.
Had interest rates been allowed to rise, the marginal homebuyers would have been taken out of the market. Had interest rates risen, more monthly income would have gone towards interest which would have meant less for principle and in turn, less for the purchase price of the house. For Greenspan not to understand or admit the connectedness of these items saddens me as I had though him to be one of the few beltway folks who were able to rise above their own egos and actually hold to the ideal of “public service.”
At one point in his testimony, Greenspan conceded that he wasn’t always right:
In the business I was in, I was right 70% of the time, but I was wrong 30% of the time
The point that Greenspan misses is not how often you are right but rather, are you right about the important issues. In this case, he clearly wasn’t. I’d be willing to bet that if you had asked Edward John Smith how often he was correct in his business, he’d of likely told you a percentage much higher than Greenspan’s. Yeah, lots of good that did the folks on the Titanic and lots of good Greenspan’s batting average did us!