• Jeff Matthews

‘The Undertaker’ Tries to Bury his Past


The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall…. —Alan Greenspan, The Wall Street Journal Thus former Fed Chairman Alan Greenspan (“Easy Al” to his detractors and “The Undertaker” to his mentor, Ayn Rand) begins his latest attempt to rewrite history, in a remarkable op-ed piece in today’s Wall Street Journal: “The Roots of the Mortgage Crisis.”

And NotMakingThisUp is happy to report that today’s piece is every bit as full of bizarre self-justifications as Greenspan’s recent autobiography, “The Age of Turbulence.”

(That book is so off the charts that we speculated the working title must have been “Purple Haze, All in My Brain, Rainy Days You Don’t Seem The Same, One Pill Makes You Larger and One Pill Makes You Small, but I Get High With a Little Help From My Friends so Why Does it Feel Like They’re All Staring At Me?”—see “‘The Undertaker’ and his Economic Doobie Brothers” from November 18).

Now, we all know what Greenspan is up to here, don’t we? Greenspan—the most revered Fed Chairman of all time, except by the gold-bugs, economic Cassandras and short-sellers who fruitlessly fought his easy money policy for nearly 20 years—wants desperately not to be blamed for the housing bubble that his easy money policy caused.

To paraphrase Pink Floyd, that’s what the writing’s all about, and Greenspan makes no bones about it in the heart of today’s piece, 10 paragraphs down:

After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own. There was clearly little the world’s central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century. In other words, Alan Greenspan wants us to believe that the most powerful Fed Chairman in U.S. history was powerless to stop the greatest housing bubble of U.S. history, despite the fact that he stood at the monetary control button that directly inflated that bubble.

But he’s a Republican, and a cagey politician at that, so he’s not going to try to avoid responsibility altogether:

I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices. Thus Greenspan opens the door to an admission of what any—and I mean this literally—fool knows: that his 1% pedal-to-the-metal interest rate policy during one of the great world economic booms of all-time had everything to do with the ensuing drama.

But he opens the door no further, and quickly shuts it with this whopper:

In my judgment, however, the impact on demand for homes financed with ARMs was not major. Before you have time to spit out your coffee, “Easy Al”—as he was known throughout his brilliant career—tries to explain himself with an outright fake conclusion from a meaningless data point:

Demand in those days was driven by the expectation of rising prices — the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted). [Emphasis added] The fact that home prices continued to rise after the peak of ARM originations—“seasonally adjusted”!—is as meaningless as anything else in this tract. Anybody who knows anything about free markets knows that incremental demand by uninformed buyers is what drives bubble prices to their peaks.

The rest of “Roots” is a tale told by a politically savvy retired Fed Chairman eager for long-term glory, full of data and the kind of “woulda, coulda, shoulda” self-justifications that don’t mean a thing to the poor shlub enticed into a low-interest ARM five years ago when “Easy Al” set a marginal interest far below the true rate of inflation.

Which, by the way, is the true root of the mortgage crisis.

Unfortunately that’s not long enough for an op-ed piece in the Wall Street Journal.

Jeff Matthews I Am Not Making This Up © 2007 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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