Blaming Greenspan


Alan Greenspan accepts no responsibility for the current situation:

Demand in those days was driven by the expectation of rising prices–the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted).

Felix Salmon critiques this on the grounds that “the main reason why the housing bust seems to be much worse in the US than elsewhere is surely those ARMs – which, as Greenspan concedes, were a function of low short-term interest rates.” There seems to me to be a more fundamental problem here. Greenspan had what he thought were good reasons to put interest rates very low. One consequence of that was to make ARMs look more appealing to a lot of people. Greenspan could have responded to that in one of three ways. He could have ignored the ARM issue. He didn’t do that. He could have tried to warn people about the risks of ARMs. He didn’t do that. Instead, Greenspan encouraged people to get ARMs. I think it’s never really been clear why he did that, but it was pretty bad advice and he just doesn’t mention it at all during his retrospective.