Blame Greenspan for this bubble, too
The former Fed chief pushed subprime lending like a shady mortgage broker as he helped promote the second asset bubble in a decade.
By Bill Fleckenstein
Amid all the confusion over subprime lending, it's worth bringing one fact to the fore: Alan Greenspan was recommending adjustable-rate mortgages in February 2004 -- just as short-term rates were making their lows. Then, in a speech on April 8, 2005, he extolled subprime lending:
"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. . . . As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. . . . This fact underscores the importance of our roles as policymakers, researchers, bankers and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers."
Be it ever so subprime, there's no place like home
Not until after the debacle unfolded did Greenspan warn banks about imprudent lending standards.
Regular readers are well aware of my opinion of the Fed, which has not been widely embraced. Last Wednesday, however, it was echoed in the mainstream press, via Andy Laperriere's outstanding article in The Wall Street Journal, "Mortgage Meltdown." If it were within my power, I'd make everyone in America read this, and then read it again. Not only does Laperriere debunk the myth that subprime is tiny and the fallout will be minimal, he also lays blame where blame is due:
"The fact that Congress is now holding hearings on the fallout from the second major asset bubble in the last decade should prompt some broader questions. For example, what role did the Fed's loose monetary policy from 2002 to 2004 play in fueling the housing bubble? Should the Federal Reserve re-examine its policy of ignoring asset bubbles? Asset bubbles are harmful for the same reason high inflation is: Both create misleading price signals that lead to a misallocation of economic resources and sow the seeds for an inevitable bust. The unwinding of today's housing bubble is not merely an academic question: It is likely to inflict real hardship on millions of Americans. To reduce the risk of a similar outcome in the future, it is important that policymakers, economists, and policy analysts correctly diagnose the root cause of the current housing bust, not just its symptoms."
Upending the happy-ending scenario
Unfortunately, there has been little thought given to the matter, now that the subprime-stock arena has recovered a bit. I am really amazed at how entrenched the belief is that the housing market will continue as it has for the past few years, and that whatever negative occurs due to the subprime debacle will be a hiccup.
In fact, many headlines last week were quick to soft-pedal the effect of tightened lending -- which has now become reality for a huge chunk of the mortgage market -- on our economy. Bloomberg, for example, ran this one: "Housing Starts In U.S. Rise More Than Estimated, Easing Slowdown Concerns.
That view is just plain silly, as the impact is already beginning to seep into various economic statistics, as I have noted in my daily column on my Web site. (For those who'd like to really understand more about how all the pieces of the mortgage food chain fit together, click here to listen to Jim Grant.
It's the unvarnished (furniture) truth
And, it also is evident in the following front-line account from a reader of my daily column: "Our business is a large hardwood sawmill (sawing oak, maple, cherry, ash, etc., for the furniture (read: HOUSING) industry. We usually enter recession five to six months ahead of the rest of the economy. IT'S HERE! Prices for green and finished lumber are falling at a faster rate than at any time since 1974. We could see it coming for quite a while, but it's not possible to do much more than clean up the balance sheet and get ready to adjust prices paid downward, while still paying enough to keep the loggers alive.
"Timber prices are falling, but never fast enough. I've been predicting 'the big one' for years, and I think 'this time down' will be the worst we've ever seen. No government bailouts in the hardwood industry. It's sink or swim. I anticipate a few years to work through this mess."
So much depends on the Goldilocks economy: too hot and the Fed will raise interest rates; too cold and earnings will tumble. "Just right," though, is a very narrow bed for the stock market to occupy.
But without the Fed's policy -- notably Greenspan's during his entire 18-year tenure -- of repeatedly bailing out reckless speculators, the problems we face would, in all likelihood, never have reached such gargantuan proportions. (This is not to absolve Corporate America, Wall Street or Joe Six Pack of their greed and cutting of corners.) I expect by sometime in the next three or four months, it will be quite clear that the economy is headed for a serious consumer-led recession. |
