"The question is whether you were lying then or are you lying now... or whether in fact you are a chronic and habitual LIAR!...""My Lord, may I also remind my learned friend that his witness, by her own admission, has already violated so many oaths that I am surprised the Testament did not LEAP FROM HER HAND when she was sworn here today! I doubt if anything is to be gained by questioning you any further!
Sir Wilfrid played by Charles Laughton, Witness for the Prosection
USA TODAY February 23, 2004
"Federal Reserve Chairman Alan Greenspan said Monday that Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.
In a standing-room-only speech to the Credit Union National Association meeting here, Greenspan also said U.S. household finances appeared generally sound, despite rising debt levels and bankruptcy filings. Low interest rates and surging home prices have given consumers flexibility to manage debt, he said. "Overall, the household sector seems to be in good shape."
Alan Greenspan, April 8,2005 Washington, D.C.
"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants...
With these advances in technology, lenders have taken advantage of credit scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers...
Where once more marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending... fostering constructive innovation that is both responsive to market demand and beneficial to consumers."
The Fed is blameless on the property bubbleBy Alan Greenspan
Financial Times - Commentary
Published: April 6 2008 22:03
I am puzzled why the remarkably similar housing bubbles that emerged in more than two dozen countries between 2001 and 2006 are not seen to have a common cause. The dramatic fall in real long-term interest rates statistically explains, and is the most likely major cause of, real estate capitalisation rates (rent as a percentage of a property’s value) that declined and converged across the globe. By 2006, long-term interest rates for all developed and main developing economies declined to single digits, I believe for the first time ever.
Doubtless each individual housing bubble has its own idiosyncratic characteristics and some point to Federal Reserve monetary policy complicity in the US bubble. But the US bubble was close to median world experience and the evidence that monetary policy added to the bubble is statistically very fragile. Paul De Grauwe, writing in the Financial Times’ Economists’ Forum, depends on John Taylor’s counterfactual model simulations to conclude that the low funds rate was the source of the US housing bubble. Mr Taylor (with whom I rarely disagree) and others derive their simulations from model structures that have been consistently unable to anticipate the onset of recessions or financial crises. Counterfactuals from such flawed structures cannot form the basis for policy.
Mr De Grauwe asserts that “signs of recovery” (I assume he means sustainable recovery) were evident before 2004 and hence the Fed should have started to tighten earlier. With inflation falling to quite low levels, that was not the way the pre-2004 period was experienced at the time. As late as June 2003, the Fed reported that “conditions remained sluggish in most districts”. Moreover, low rates did not trigger “a massive credit ... expansion”. Both the monetary base and the M2 indicator rose less than 5 per cent in the subsequent year, scarcely tinder for a massive credit expansion.
Bank loan officers, in my experience, know far more about the risks and workings of their counterparties than do bank regulators. Regulators, to be effective, have to be forward-looking to anticipate the next financial malfunction. This has not proved feasible. Regulators confronting real-time uncertainty have rarely, if ever, been able to achieve the level of future clarity required to act pre-emptively. Most regulatory activity focuses on activities that precipitated previous crises.
Aside from far greater efforts to ferret out fraud (a long-time concern of mine), would a material tightening of regulation improve financial performance? I doubt it. The problem is not the lack of regulation but unrealistic expectations about what regulators are able to prevent. How can we otherwise explain how the UK’s Financial Services Authority, whose effectiveness is held in such high regard, fumbled Northern Rock? Or in the US, our best examiners have repeatedly failed over the years. These are not aberrations.
The core of the subprime problem lies with the misjudgments of the investment community. Subprime securitisation exploded because subprime mortgage-backed securities were seemingly underpriced (high-yielding) at original issuance. Subprime delinquencies and foreclosures were modest at the time, creating the illusion of great profit opportunities. Investors of all stripes pressed securitisers for more MBSs. Securitisers, in turn, pressed lenders for mortgage paper with little concern about its quality. Even with full authority to intervene, it is not credible that regulators would have been able to prevent the subprime debacle.
Martin Wolf argues in the FT that central banks “can surely lean against the wind” even if they cannot eliminate bubbles. I know of no instance in which such a policy has been successful. For reasons I have outlined elsewhere (American Economic Association, January 2004), I doubt that it is possible. If it turns out to be feasible, I would become a strong supporter of “leaning against the wind”.
As far as US monetary policy being (in Mr Wolf’s words) “dangerously asymmetrical”, I point out that over the past half-century the US economy has been in recession only one-seventh of the time. Yet the unemployment rate exhibits no trend. Hence the average rate of rise of unemployment has been far greater than its average pace of decline. Monetary policy in response has been more active during recessions than during periods of expansion, but scarcely “dangerous”.
Much of the commentary critical of my FT article (Comment, March 17) is directed less at its substance and more, as Mr Wolf describes it, at “the ideology I display”. Ideology defines that set of ideas that we each believe explains how the world works and how we need to act to achieve our goals. Some of our views of causative forces are rational, some otherwise. Much of what we confront in reality is uncertain, some of it frighteningly so. Yet people have no choice but to make judgments on the nature of the tenuous ties of causation or they are immobilised.
I do have an ideology. So does each member of the forum. I trust our views are subject to the same standards of evidence that apply to all rational discourse. My view of how the efficiency of global capitalism has evolved over the decades as new evidence has appeared contradicts some earlier judgments and confirms others. I have been surprised by the fierceness of investors in retrenching from risk since August. My view of the range of dispersion of outcomes has been shaken but not my judgment that free competitive markets are the unrivalled way to organise economies. We have tried regulation ranging from heavy to central planning. None meaningfully worked. Do we wish to retest the evidence?
The writer is former chairman of the US Federal Reserve. A longer version of this article is on the FT’s Economists’ Forum at www.ft.com/wolfforum
