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Source link: http://archive.mises.org/9170/yes-greenspan-did-it/

Yes, Greenspan Did It

December 31, 2008 by

There can be no doubt that Greenspan, primarily through his low interest rate policy but also through the negative effects of his various bailouts, was responsible for the housing bubble and therefore the current slump. While the Community Reinvestment Act and the activities of Fannie Mae and Freddie Mac aggravated the crisis, their role was only minor. FULL ARTICLE


redshirt December 31, 2008 at 11:09 am

No comments?! Excellent article. And your linked info is also very informative… I am admittedly not following all of it, but happy to find it!

George December 31, 2008 at 11:51 am

In Greenspans book, The Age of Turbulence, there’s a passage on page 297 where Greenspan describes his debate with Li Peng and Greenspan told Li Peng that the US tried price controls (under Nixon) but learned that they don’t work and learned not to do them.

This conversation was during the period when Greenspan was head of the Fed and controlling US interest rates….

I find it hard to believe that Greenspan didn’t realize the disconnect in this.

Inquisitor December 31, 2008 at 12:04 pm

Difficult article to follow, but good. I appreciate the fact that the author is not a native speaker of English, but this does make the article somewhat trickier to read.

greg December 31, 2008 at 2:12 pm

As a spec home builder for 20+ years, I have NEVER based my decision to build a home on the interest rate! My decision was always based on cost that have a greater percentage impact on the total package.

In this latest downturn, I am currently sitting without a single house in inventory. The reason is that speculation in real estate pushed land cost beyond my cost threshold. Add to that, the cost of lumber was hitting $500 per thousand bf and sheetrock jumped to $20 a sheet. Labor cost also was 30% higher and when I added it up, the sales price was out of line from houses that were built earlier.

Now, I am putting together spec packages as land cost have dropped, lumber is now $200 and labor has fallen more than 30%. Basically, I can come in with a new house and be 25% less than any other house on the market that paid the higher cost. And when I have completed these homes, 9 months will have passed and the supply of new homes will be down which will limit my competition.

Speculation drives the market, watch your job cost, not the interest rate and you can forecast trends in real estate.

chillguy33 December 31, 2008 at 8:07 pm

To transfer ownership of overvalued real property to unqualified (meaning not likely to pay) mortgagors was the unwise goal of Clinton’s 1995 subprime authorization.

No matter what the interest rate, normal mortgage vetting practice would have precluded the subprime junk mortgage meltdown. Normal practice includes critical examination of the collateral, and the borrower. This was prevented by government.

The United States government “progressively” beginning in approximately 1935 entered the mortgage finance industry. Lending practices were “progressively” degraded to make sure the right voting blocks could have “affordable mortgages” without income checks, without down payments, and without credit checks, by 1995.

Under the manipulation of the US government, the US mortgage finance industry promulgated toxic loan instruments.

Low interest rates as determined by Greenspan were a minor factor.

The significant, important factor was bad lending practice demanded by government officials who thought they knew more about economics than private, free market industry.

newson December 31, 2008 at 11:22 pm

to greg:
interest rates are implicit in all costs, not just land/housing prices. lumber, copper, concrete etc.

newson December 31, 2008 at 11:35 pm

chillguy33 says:
“Low interest rates as determined by Greenspan were a minor factor.”

here in australia our central bank followed the greenspan template(roughly), and we ended up with a gigantic property bubble. we had no government-mandated targeting (bar a modest new-home-owner’s bonus). interest rates were the only factor to have changed dramatically over this cycle, and are the only logical cause.

newson January 1, 2009 at 12:07 am

dr murphy uses a bank reserve multiplier of ten (admitedly in a textbook-style treatment) in his most recent article on the subject (http://mises.org/daily/3252).

this seems to imply that he hasn’t taken karlsson’s bank-reserve criticism on board.

hatch’s paper on sweeps is excellent (http://mises.org/journals/scholar/hatch.pdf)

Sally Copperwaite January 1, 2009 at 7:09 am

I agree with your article but you do not mention the inflationary impact of the repeal of the Glass Steagall Act in 1999. Just reading the entry in Wikipedia for Glass Steagall is very illuminating:’In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act.’
Banks had been trying to repeal the Act for decades. This was the argument for preserving Glass-Steagall (as written in 1987):

1. Conflicts of interest characterize the granting of credit – lending – and the use of credit – investing – by the same entity, which led to abuses that originally produced the Act

2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.

3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).

The repeal of Glass Steagall under Bill Clinton has a lot to answer for.

chillguy33 January 1, 2009 at 2:22 pm


Greenspan held interest rates low for months. FNMA targeted $trillions (far more than 2 trillion, at least) of subprime, junk mortgages, which it then sold to the world in a tidy wrapper, disguising cleverly the contents. Unqualified buyers of all types came out of the woodwork, mortgaging overvalued collateral. This was done over several, perhaps 10-12 years.

I am interested in the contrast of the Australian experience you have provided. I hope to learn more about how the Australian bubble was caused; because I suspect some factor in addition to interest rates. Please comment further if possible.

newson January 1, 2009 at 8:52 pm

to chillguy33:
here’s a chart from the reserve bank of australia showing the cash rate (which is the targeted rate here in australia, equivalent to the us fed funds rate).

you can download the various monetary aggregates (http://www.rba.gov.au/Statistics/AlphaListing/alpha_listing_m.html). whichever one you choose, money supply has more than doubled over the last decade.

when the rba dropped rates in line with the fed after the world trade attacks, it set the real-estate market alight. expansive money policy met with the perceived safety of bricks and mortar (people had been stung by the decline in the stock market following the steep correction of 2002). the bubble was pricked by the rba’s moving of the cash rate up to 7.25% in march 2008.

there were no important policy changes over this period which would otherwise explain the red-hot property market we experienced over the same time frame as your bubble.

newson January 1, 2009 at 9:16 pm

to sally copperwaite:
glass steagall is a red herring. lew rockwell deals with this issue here:

newson January 1, 2009 at 9:20 pm

the tabarrok article on glass steagall, cited by rockwell is here:

Sally C. January 2, 2009 at 6:30 am

To Newson,
Thank you for those links. I will now wade through them. Basically, my argument is that once Glass-Steagall once repealed, massive amounts of commercial bank capital was quickly put to work creating, selling and investing in mortgage-backed securities (and other potentially high risk assets) and that Greenspan did not take this sufficiently into account when setting the Federal Funds Rate. In order to subdue the flood of cashing heading for the housing market he needed to be a lot more agressive in raising interest rates.

Sally C. January 2, 2009 at 9:26 am

To Newson,
Sorry about the spelling mistakes- I was in a hurry! Please read:

“once Glass-Steagall WAS repealed”

“the flood of CASH heading for the housing market”

and “aggressive”.

(My English is usually better than that!)

SailDog January 2, 2009 at 11:21 pm

There seems to be a peculiar myopia among economists and those of the Austrian School in particular.

“It was Greenspan wot did it” sums up this article. Not mentioned is the fact that every post WW2 recession has been preceded by a spike in oil prices, including this one with the biggest spike ever.

This being the Austrian school, there will be little understanding or acceptance that energy is critical in our economies. No energy = no economy (or virtually none). A little too little energy = high prices = depression seems also to be true.

We may never come out of this depression. There just isn’t enough energy. The first and second laws of thermodynamics rule and no amount of Praxeology can change that. Until Austrians understand and explain this, the discipline will at best be marginal.

newson January 3, 2009 at 3:07 am

so saildog, one more time for the blind austrians, please explain how the law of thermodynamics takes oil from $150 to $40 in months.
people still driving where i’m from.

David Calderwood January 3, 2009 at 2:16 pm

Articles like this one are worthwhile from a mechanics standpoint but one still has to ask: Were the policies of the Greenspan Fed foisted on unsuspecting and potentially unwilling people, or as I find more intellectually coherent, was the same underlying shared optimism responsible for policy-makers’ and the public’s participation in such a gargantuan pyramid construction plan? Austrian economics is clearly the best mechanistic economic explanation for how things work, but it does not dive deep enough to explain why public policies and public participation are always in synch when events careen far enough off track to merit notice. Without insight into why the public demands absurd levels of credit creation (e.g. the very existence of a central bank) when the public is ready to embrace them, and why the public then rejects the product of that system (causing a credit collapse such as we are now experiencing) at a different point, then one has no analytically meaningful perspective.

If you want to get a handle on this, get a copy of Prechter’s 1995 “At the Crest of the Tidal Wave,” and consider the notion that someone could forecast the most important economic trend change in our lives with an accuracy of +/- half a decade.

SailDog January 3, 2009 at 4:06 pm

The problem is broader than wether oil is $150 or $40. You assume no physical or biological limits to human growth. Most economists cling to an 18th century mechanical universe that conjured an “invisible hand” (of God?), that allegedly converts private greed into public utopia.

But on the subject of that $150 and $40: Go and have a look at elasticity again. The wildly volatile price is behaving as I would expect. And people will always drive where you are because oil will never run out.

As I said: You do not get it, because you do not accept limits. But there are limits and they are affecting us all.

Fascist Nation January 3, 2009 at 6:54 pm

Is Alan Greenspan, John Galt?

newson January 3, 2009 at 7:06 pm

to saildog:
given that demand for oil is inelastic, and agreed that we’ll never run out of the stuff, you’ve still dodged the question as to why the run-up to $150 and then the collapse to $40.
there is a monetary overlay over simple supply/demand, hence the austrians’ disdain for monetary meddling.

“utopia” is not a word in the austrian lexicon, try socialism if that’s your thing.

chillguy33 January 3, 2009 at 8:49 pm


Thanks very much for the additional information you have generously provided.

McFly January 4, 2009 at 1:43 am


I would agree with you in sighting the expansionary monetary policy of the RBA as the primary cause of the housing price bubbles experienced in most major cities in Australia. However, one cannot overlook the impact of the resources boom on house prices, especially in Western Australia and Queensland

newson January 4, 2009 at 2:55 am

to mcfly:
sure, there are local factors like the resource boom, and you could also cite supply issues like releasing new land at a trickle (i’m in wa and this was the case here), and making developers pay for the town-planners’ expensive wish-lists, but still the driver is monetary policy.
even poor old tasmania saw prices double, and what is down there except hippy markets and pulp?

Brian Macker January 4, 2009 at 5:47 am


But the resources boom was due to the monetary inflation. So checkmate.

Paul January 4, 2009 at 2:38 pm

credit default swaps were used to cover the underlying risk in mortgage securities. I don’t think investors could tell the difference between a AAA rated investement with sub-prime mortgates backed by a credit default swap and others that didn’t.

Paul January 4, 2009 at 2:38 pm

credit default swaps were used to cover the underlying risk in mortgage securities. I don’t think investors could tell the difference between a AAA rated investement with sub-prime mortgates backed by a credit default swap and others that didn’t.

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