Martin Wolf: Don’t scapegoat Greenspan for housing sector’s woes
Posted by: admin in Real Estate and Housing
Filed under: International markets, Columns, Housing, Recession
Every economic problem or setback seeks a scapegoat — someone decision makers, pundits, and others can blame (unjustifiably) for a turn of events that’s preferred by virtually no one.
The criticism is parsimonious, unfair, and injurious — but that hasn’t seemed to stop practitioners from venturing forth with charges that are often tenuous, if not absurd.
Scapegoat-of-the-moment
The ever-incisive FT columnist Martin Wolf points out that former U.S. Federal Reserve Chairman Alan Greenspan is being cast as ‘the villain’ for the housing bubble, its bursting, and consequent impact on credit/bond markets and credit availability. All of it is unfair, Wolf notes, and he provides ample evidence to support his point.
Chiefly: Greenspan did not create low, long-term interest rates. The low, long-term rates were caused primarily by a global savings glut, Wolf said. (See: China’s savings rate.) The Fed had little control over this — Greenspan even creatively and accurately referred to the Fed’s inability to force long-term rates higher despite the Fed’s best effort: he called it “a conundrum.” Given the surplus savings sloshing around in global markets at that time, among other factors, those low rates would have occurred regardless of who was Fed chairman.
That Americans are unwilling to recognize this undeniable fact — long-term interest rates beyond the United States’ control — would not be inconsistent with the American ethos, Wolf notes. Americans never want to admit that there are circumstances the nation can not control, hence the need to find ‘a person who caused’ the housing tragedy.
Second, Wolf notes that housing bubbles occurred in other countries, as well, during 1997-2007: in the United Kingdom, Ireland, Netherlands, and Australia, among other countries. Unless one is prepared to say Alan Greenspan caused these bubbles, as well (an empirically weak argument), then one has to admit that perhaps there were other factors — perhaps even global factors — that contributed to housings’ great ride up and ride down.
Bubbles here, there, and everywhere
Further, Wolf does not point it out but it bears repeating: in addition to housing, the United States has now experienced a string of bubbles (silver, dot-com / tech, Nasdaq, fine art?, oil / grains / commodities?) in its recent history. Greenspan wasn’t involved in any of these. But given that they occurred, perhaps it’s prudent to research what other structural factors in the American economy may have produced these bubbles. (Regarding fine art, if it conforms to housing’s asset appreciation dynamic, fine art values are in for a major decline. Stay tuned.)
Economic Analysis: Wolf does criticize Greenspan for being part of the government structure that contained what we now know was (and is) inadequate mortgage regulation. But to say that the housing sector’s current woes rest with him, and not with the FDIC, Fannie Mae, Freddie Mac, the Mortgage Bankers Association, and the U.S. Congress, is a simplistic and flawed argument, if ever there was one.
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