In an interview last week on CNBC, former US Federal Reserve chairman Alan
Greenspan cast his eyes on the charred landscape of the national real estate
market and offered high-minded criticisms of the obvious excesses and
irrationalities that brought on the devastation.
Greenspan's attitude was akin to a retired drug dealer lamenting the urban
blight caused by rampant addiction. He noted that housing prices were still too
high, that too many homeowners were upside down on their mortgages, and that
Fannie Mae and Freddie Mac were accidents waiting to happen. Methinks the
serial bubble blower doth protest too much.
The housing bubble was Greenspan's doing pure and simple. He
gave birth to it, nurtured it, protected it, and guided it during every stage
of its development. In fact, if there was a deck of playing cards featuring the
key players in this debacle, Alan Greenspan would be the ace of spades. The
fact that the media still hold this joker in such high esteem is a testament to
just how clueless they are. Rather than fawning over his every word,
journalists should be grilling him like an intelligence interrogator.
In his new post-Fed incarnation, Greenspan does show an increased willingness
to speak the truth ... perhaps sharp candor generates higher speaking fees than
murky academic jargon. However, conveniently missing from his belated admission
that home prices are too high is that his irresponsible monetary policies
propelled prices to those heights in the first place. In fact, even as the
housing bubble was inflating, Greenspan repeatedly denied its existence. He
took every opportunity to talk the real estate market up and went out of his
way to justify irrationally high home prices.
His concerns about upside-down mortgages are particularly offensive, given his
consistent praise when he was Fed chairman of the ability of home equity
extractions to fuel economic growth. In fact, during the final years of his
tenure there was no greater proponent for cash out refinancing than Greenspan.
Not only did the maestro routinely commend homeowners for their sophisticated
approach to "managing their home equity", but he applauded Wall Street and
mortgage lenders for their creativity and ingenuity. Of course, home equity
extractions are largely responsible for so many homeowners now owing more than
their homes are worth.
His most brazen contention was that he had tried to warn us of the dangers that
mortgage guarantors Fannie Mae and Freddie Mac could pose to the entire
economy. Excuse me, but when exactly did he sound this alarm?
His points that Fannie and Freddie should not exist, and that the moral hazard
of private profits and socialized losses is an accident waiting to happen would
have been right on point had he actually made them while still Fed chairman.
Too bad CNBC interviewer Maria Bartiromo did not remind Greenspan that the
accident has already taken place. Fannie and Freddie's flawed design may have
rendered them destined to slip, but it was Greenspan who supplied the banana
peel.
Peter Schiff is president and chief global strategist of Euro Pacific
Capital. He is the author of Crash Proof: How to Profit from the Coming
Economic Collapse (Wiley & Sons, 2007) and his second book is scheduled for
publication in early 2009. Euro Pacific Capital commentary and market news is
available at www.europac.net It has a
free online investment newsletter.
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