You can find a pretty informative post on the housing bubble from the blog "The Big Picture" here:
http://bigpicture.typepad.com/comments/2008/10/goal-increase-m.html

Everything in it makes sense except when he seems to perpetuate the familiar "progressive" line that there never would have been a bubble in the housing market if Alan Greenspan just hadn't left interest rates "so low, for so long":

Quote :

"This is the key to the housing boom and bust, and ultimately underlies the entire credit freeze. And, it would not have been possible without the Greenspan ultra-low rates, which made the teaser portion (the "2" of the 2/28) of these mortgages so attractive. "

IMO, this puts too much blame at Greenspan's door (he just so happens to be a free-market-loving Republican that is vilified by the left but I'm sure that has nothing to do with this). I think Alan Greenspan is at least mostly innocent of any charges of "negligence" for one primary reason...

Empirical evidence suggests that the Federal Reserve simply does not have much direct control over long-term interest rates like mortgage rates!!!

Here is a good article from 1995 by Roley Vance at the Federal Reserve Bank of Kansas City that attempts to explain the weak impact of monetary policy on long-term interest rates.
http://findarticles.com/p/articles/mi_qa3699/is_/ai_n8716156

More recently, when the Fed started easing monetary policy in 2001, long term interest rates DID NOT FALL. Here's David Altig and Ed Nosal trying to explain why long-term rates did not fall.
http://www.clevelandfed.org/research/commentary/2002/0102.pdf

Likewise, when the Fed started raising short-term rates again in 2004 (almost 2 years before the crash in housing prices), long-term interest rates did not budge. In the figure bellow I contrast the Fed Funds rate (which the fed has much more control over) with the interest rates on 30 year mortgages.

http://www.frbsf.org/publications/economics/letter/2005/el2005-08.html

Now, all of a sudden, we're suppose to ignore all of the evidence and believe that the federal reserve really is all-powerful???? Sounds a little fishy to me. I think this explaination is almost entirely about the left wanting to blame this whole mess on the "the free-market economic philosophy" that Barack Obama keeps talking about.

[Edited on October 14, 2008 at 12:31 PM. Reason : ``]

10/14/2008 12:18:21 PM

Greenspan should have done more to deflate the bubble.

10/14/2008 12:20:24 PM

^ didn't read my post huh??? My argument is that Greenspan COULDN'T have done more to prevent the bubble because he doesn't control long-term interest rates.

You should really read it. I provide links to articles from economists at the federal reserve going as far back as 1995 that essentially all say the same thing: the impact of monetary policy on long-term interest rates (like mortgage rates) is weak at best.

[Edited on October 14, 2008 at 12:25 PM. Reason : ``]

10/14/2008 12:25:16 PM

Socks, the mortgages in question are not fixed rate mortgages, but one year ARMs which most definitely do respond to short term rates.

10/14/2008 12:30:44 PM

^^

This is the point I try to make. Although there is some argument that the Fed got the party started there is simply no reason to believe that they could have stopped it.

The simple fact is that they did enact policy to deflate the bubble and it didn't work.

Thus far I have heard no evidence, or seen any argument that disputes what I see as the basic underlying reality. The credit bubble and subsequent collapse was at its heart was caused by faith in the CDO model which turned out to be misplaced.

Not Greenspan. Not Fannie. Not Freddie. Not a culture of living beyond our means. And sure as hell not the Community Reinvestment Act.

[Edited on October 14, 2008 at 12:33 PM. Reason : .]

10/14/2008 12:32:26 PM

^^^He did exert control, however, in his capacity as the Chairman of the Fed to influence short-term ("prime") rates. This is not iron-fisted control over long-term rates, but it does in general work as a leading indicator of the general money/credit supply.

Greenspan did a lot of things right - like in general, keeping a tight lid on (monetary) inflation. However, the prime rate was being frequently abused, I think, after the dot-com boom and beyond, constantly being ratcheted lower and lower, which ultimately left us with too much credit.

Worse than that, however, is the fact that it left the Fed with very, very little wiggle room should circumstances turn bad - like, say, now. Last I checked, the overnight funds rate was hovering somewhere around zero now - about the only place it can go from there is to pay banks to borrow funds. This is not exactly a good position to be in.

[Edited on October 14, 2008 at 12:33 PM. Reason : ^^^]

10/14/2008 12:32:59 PM

Quote :

"Socks``: Now, all of a sudden, we're suppose to ignore all of the evidence and believe that the federal reserve really is all-powerful????"

Duh!

Didn't you watch Zeitgeist?

OMFWTFBBQNWOJEWS!

10/14/2008 12:33:25 PM

Quote :

"didn't read my post huh???"

No, you misunderstand. Simply by calling out the bubble, Greenspan could have made a significant difference. I like the multiple question marks, though.

Quote :

"Most importantly, the Fed and its chairman can provide information. If Greenspan had carefully documented the evidence there was a housing bubble when he was Fed chairman, rather than dismissing those of us who made this argument, it is likely the bubble never would have grown to such dangerous levels. Clear warnings from the Fed chair might have made potential homebuyers more careful and made investors less anxious to throw away money making bad mortgage loans."

http://www.cepr.net/index.php/op-eds-columns/op-eds-columns/alan-greenspan-and-his-bubbles/

10/14/2008 12:52:43 PM

not sure if y'all remember, but the economy was in pretty bad shape the first few years of this decade. pretty sure the feds attention was on more pressing issues than a potential housing bubble, such as helping spur economic growth while guarding inflation - which is the primary job of all central banks. and even if in 2004 (before rates started increasing again) we had predicted the current meltdown, the solution would NOT have been to increase rates faster - it would have been to inact some regulations around sub-prime mortgages.

10/14/2008 1:07:45 PM

do people really think that there is one sole party responsible for this mess?

10/14/2008 1:31:01 PM

Quote :

"Most importantly, the Fed and its chairman can provide information. If Greenspan had carefully documented the evidence there was a housing bubble when he was Fed chairman, rather than dismissing those of us who made this argument, it is likely the bubble never would have grown to such dangerous levels. Clear warnings from the Fed chair might have made potential homebuyers more careful and made investors less anxious to throw away money making bad mortgage loans."

Unless Greenspan was going to go out and say, Asset Backed Paper is a bunch of crap, I don't see how he was going to make a difference. The CDO market was wildly profitable. The financial system was swimming in profits, much of the paper was rated AAA, and that that wasn't was paying sky-high yields. How are you going to stop that party.

The thing to remember I think is that from the outside this didn't look even as risky as the dot-com bubble. It wasn't that you had to expect exorbitant profits sometime in the future. The paper was paying huge profits from day one. You just had to not expect unprecedented default rates.

10/14/2008 1:37:30 PM

Actually, most of the flak Greenspan seems to be catching these days isn't for the housing bubble but for his strong support for not just derivatives but the loose regulations surrounding them as well.

10/14/2008 1:40:55 PM

http://www.ncsu.edu/millenniumseminars/

10/14/2008 1:54:00 PM

I like how socks`` gets an attack in there on "progressives" even though progressives aren't blaming Greenspan.

10/14/2008 2:06:26 PM

Quote :

"do people really think that there is one sole party responsible for this mess?"

I am not one of these people. I also think the housing bubble was only part of why the stock market collapsed. I place almost all of that blame on Wall Street.

10/14/2008 4:16:37 PM

nutsmaker,

I would say that the "Big Picture" leans progressive, and that is the argument he is making. But there are others. I would certainly consider Paul Krugman a progressive and he has been railing against Greenspan for years, making the exact same argument.

[Edited on October 14, 2008 at 4:51 PM. Reason : ``]

10/14/2008 4:50:52 PM