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(DV) Whitney: Greenspan's Role in the Housing Bubble







Greenspan’s Role in the Housing Bubble
by Mike Whitney
August 17, 2005

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It’s strange that Alan Greenspan hasn’t been blamed for the housing bubble. After all, he set the “easy money” policies that put the whole thing in motion and he’s the one who should be held responsible when it goes up in smoke.

Let me explain.

Most people expect the Federal Reserve to lower rates when business is flagging to stimulate the economy by making loans more available for commerce, home buying, recreational spending etc. But, just as higher rates can stop the economy in its tracks by making money too expensive to borrow, so too, lower rates can have equally adverse consequences.

For example, when Greenspan lowered rates to 1% in 2002 he knew that money would surge into the economy and create the appearance that everything was hunky-dory. Predictably, the economy sputtered along from the economic activity generated by the housing boom and from the 30% increase in government spending.

But, what else did Greenspan’s lower rates achieve?

Well, they achieved the results for which they were designed: they kept the economy humming along while Bush dragged the country to war, they kept the American people asleep while $400 billion per year in Bush tax cuts were siphoned from the US Treasury, and they generated what the The Economist calls the “the biggest bubble in history”: the housing bubble.

All of these were purely political choices made at the Federal Reserve under the auspices of Fed chairman Greenspan.

Thanks, Alan.

Now, of course, Greenspan has signaled that the Happy Days are over and that the Fed will continue to ratchet up rates to strengthen the dollar. So far, the Fed has raised rates 10 times in the last 14 months. This eventually will strain the resources of all the poor slobs who took out ARMs (Adjustable Rate Mortgages) trusting in the soundness of the system. They will inevitably see their monthly payments go through the roof.

No one understands the ins and outs of monetary policy better then the Federal Reserve. It’s their job, and they have plenty of experience judging the results of their decisions.  They know that when they lower rates the public will borrow boatloads of cash and dump it in the preferred investment of the day. Since, many American’s were burned in the 1990s stock market crash, investing in the housing market seemed like a logical alternative. But, as more and more people entered the market, housing prices skyrocketed well beyond their true value, and that hyperinflation was recorded in the monthly housing figures. Greenspan, who prides himself on studying every abstruse fact and figure about the economy, was fully aware of the speculative bubble that was emerging before his eyes. He also knew about the “interest only loans,” “the no-down payments,” the shaky lending practices, and the exaggerated prices, but just like the 1990s, when he had every opportunity to raise marginal rates on stocks and stop the bleeding, he kept the game in motion.

Greenspan knows all about “irrational exuberance,” he is its primary champion. The Fed seduces the public with cheap money, so that credit spending increases and, then, “presto”, millions of Americans slip inexorably into indentured servitude.

Isn’t this what’s happening right now?

The American public is presently mortgaged up to the hilt with most of their personal wealth invested in their homes and with the highest level of personal debt in any period since the Great Depression.

Not good.

Especially when we consider that the current bubble is “larger than the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stock market bubble in the late 1920s (55% of GDP).”

Or, when we consider that “over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP.” (The Economist)

Or, when we consider that 2 out of every 5 jobs in America are now related to construction. One blip in the housing market and we’ll all be hawking pencils on the street corner.

Regrettably, this Greenspan-generated pyramid scheme is headed for the dumpster. The fundamentals for securing a loan have all been abandoned, putting traditionally unqualified applicants in a position to buy a home. 42% of all new home buyers cannot even come up with a few thousand dollars for a down payment. Equally disturbing is the fact that “nearly one third of all new mortgages this year call for interest-only payments (in California, it's almost half)” (NY Times)

The Fed’s “cheap money” policy has spawned a “creative financing” monster and the speculation in the housing market has grown accordingly. A full 36% of homes are bought either for investment or as second homes; “the very definition of a financial bubble.” (The Economist)

“Speculation”? Not according to Colonel Greenspan. According to him, it’s just a bit of “froth” in the market.

“Froth”? The biggest bubble in history?!!

Of course, none of this even vaguely resembles the activities of a “free market.” The market is not free when a privately owned banking system like the Federal Reserve sets the prime rate according to its own political-economic agenda.

Most people have no idea to what extent Greenspan has abandoned his principles to carry out his task as the country’s foremost class-warrior. Earlier in his career, Greenspan proclaimed, “Deficit spending is simply a scheme for the confiscation of wealth.”


That, of course, was when deficits were used to pay for exorbitant social programs, like Welfare or Medicaid that benefited the broader American public. Greenspan has revised his thinking now that the deficits are a means for lining the pockets of his rich constituents.

Greenspan fully grasps the danger of his current strategy of flooding the market with, what he once called, “easy money.” As he noted in an article he wrote in 1967, “Gold and Economic Freedom”:

“After a mild business contraction in 1927 the Fed decided the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage…. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in breaking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed.”

Let’s see if we got that right?

“The excess credit which the Fed pumped into the economy . . . triggered a fantastic speculative boom . . . which collapsed the American economy”.

Sound familiar?

And who does Greenspan blame for the 1929 Depression, the people who bought the stocks on speculation or the policymakers?

The policymakers.

The “speculative imbalances” (re: Housing bubble) were the work of the policymakers just as they are today. And, in this case, that’s the Fed master himself.

Greenspan’s term at the Fed has been devastating for the dwindling American middle-class. In 1983 he worked to “fix” Social Security for upcoming generations. In fact, his fix was nothing more than a shifting of the tax burden onto poorer and middle class Americans by increasing the withholding for SS. Greenspan knew that the additional resources would be used to fund basic government operations and not stashed safely in a “lockbox” for retirement. His presumption proved to be accurate.

He’s also been an ardent supporter of financial deregulation, which has allowed foreign countries, particularly China and Japan, to buy up American assets and businesses. Deregulation has crushed America’s manufacturing sector by forcing it to compete with the poorest paid workers in the world in head-to-head competition. Now, the US is teetering from its unsustainable trade deficit and must get infusions of $2 billion per day in foreign investment per day to maintain its current standard of living. Greenspan and his “free trade” friends have hammered the American worker and tilted the nation towards third-world status. At this point, there’s little that can be done to reverse the trend other than a major overhaul of existing trade policies and a renewed effort to restore America’s manufacturing base, something neither party has even recommended.

Greenspan has worked exclusively to serve the interests of American elites. He has helped shape the policies on taxation, minimum wage and Social Security that have enriched the wealthy and battered the middle-class. His lowered interest rates have perilously expanded credit and produced the “largest speculative market of all time.” Whatever economic calamity befalls the American people certainly bears his imprimatur.

The nation now faces the end of the Greenspan epoch and the very real prospect of an economic tidal wave greater than 1929. The bubble was manufactured by Greenspan and his colleagues at the Fed to swindle millions of working-class Americans out of their life savings and to facilitate the greatest transferal of wealth in American history.

The lesson of the housing bubble is simple: whenever monetary policy is put into the hands of privately owned institutions like the Federal Reserve, those policies will invariably reflect the narrow interests of the men who own them and the members of their class.

That’s why Thomas Jefferson warned, “Banking institutions are more dangerous than standing armies.”

He undoubtedly had the Federal Reserve in mind.

Mike Whitney lives in Washington state, and can be reached at:

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