When Alan Greenspan Talks, Everyone Listens, but Should They?
Contrasting November ’06 comments on the housing market with those reported yesterday – hear from both sides of his mouth.
Palm Coast, Florida – August 14, 2008 – No Chairman of the Federal Reserve, past or present, can match Alan Greenspan’s ability to mesmerize the public, the press, and Wall Street with every utterance. Each Greenspan sentence is dissected in search of the holy grail of economic truth. But Greenspan is fallible. Let’s contrast housing market comments from his interview with Wall Street Journal editor, David Wessel, printed in yesterday’s WSJ with his comments at a Charles Schwab Impact Conference held November 6, 2006 (reported on GoToby.com at the time).
Then: The economy is going through a significant slowing period, which as best I can tell is more than likely temporary."
Now: “Home prices in the U.S. are likely to start to stabilize, or touch bottom, sometime in the first half of 2009, though prices could continue to drift lower through 2009 and beyond.”
Then: While the housing market is not out of the woods yet, the current slump may not worsen, said Greenspan. He also indicated that he expected ARM adjustments to cause some individuals problems, but they were "very unlikely to have a macro-economic effect."
Now: “A necessary condition for an end to the current global financial crisis is the stabilization of the price of homes in the U.S. Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world’s mortgage-backed securities. We won’t really know the market value of the asset side of the banking system’s balance sheet — and hence banks’ capital — until then.” Greenspan attributed the rise in home prices to a historically unusual period in which world markets pushed interest rates down and even sophisticated investors misjudged the risks they were taking.
In a mere 21 months, Greenspan jumped from "very unlikely to have a macro-economic effect" to "a necessary condition for an end to the current global financial crisis." No pause for an apology. No acknowledgement of his past prediction errors. No recognition of the consequences resulting from individuals and institutions accepting his utterances as gospel.
Many blame Greenspan for the housing crisis. He is currently on a mission to save his image. He’s right when he says investors’ risk analysis was flawed, but who was guiding the investors? The one and only Alan Greenspan, who the WSJ calls "a long-time student of housing markets," led the parade. And we all followed wearing our happy ears. Now we’ve put our happy ears away and many of us don’t even remember where they put them.
Greenspan
I enjoy your website; keep up the good work. However, I have two comments about your Greenspan piece:
– If investors rely on one man’s opinions to "lead" major investment decisions, then yes their investment risk analysis was indeed, flawed.
-If Greenspan was the leader, then surely, real estate brokers were good soldiers, more than happy to sell lots of property to "sub prime" buyers and highly leveraged flippers who had no real way of paying back their mortgages if interest rates rose or property values fell.
Reply to Roy
You have a point. However people were complicit along the entire transaction chain; realtors, buyer/speculators, appraisers, closing agents, mortgage companies, and our governmental watchdogs. As I said, we all had our happy ears on. As closely as I watch the market, I managed to buy my last investment property at the top, thinking at that time that the market still had momentum. Then I compounded the problem by underestimating the decline. I followed the market down, eventually selling below my mortgage amount. I had to show up at the closing with a check.
My point is that in his position, Greenspan is listened to with more awe than I ever will be. He had so much more information available to him than we did. Now he changes his tune in a matter of months without looking back. I, at least take full responsibility for my bad decision. I take some comfort in the fact that others, including Carl Icahn, made decisions even worse than mine.
I don’t blame Greenspan singularly for the market crisis. I do think, however, that he should be more forthcoming about his miscalculations.