FT.com – Greenspan’s sins return to haunt us – Why I can’t bear to read the book….
by Tom on September 22, 2008
in Market Musings
My parents bought me Alan Greenspan’s book, “The Maestro” for Christmas last year. I’ve read 5 pages of it and I couldn’t pick it up any more. I think this article from the Financial Times says it quite well. Greenspan made some substantial mistakes and we are paying for them….
Even as things went completely wild, Mr Greenspan dismissed those who warned that a new bubble was emerging. It was just a case of a little “froth” in a few areas. Later, after waiting until 2007, two years after he left office, he conceded that “froth” had been his euphemism for “bubble”. “All the froth bubbles add up to an aggregate bubble,” he told the Financial Times.
This time, as with the equity bubble, the mistake was not to set interest rates too low; it was to stand back as wildly imprudent policies were pursued by mortgage lenders. Indeed, any lender would have been encouraged by his words in April 2005: “Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending.” Well, he was right about the rapid growth in subprime lending.
Mr Greenspan was in charge of supervising and regulating much of the banking industry for two decades. The Fed says it is responsible for ensuring “safe and sound banking practices”. It is right that other regulators should have stepped in, too – the US regulatory structure has not kept pace with market changes . But given the Fed’s institutional importance and Mr Greenspan’s personal stature, does anyone doubt that the Fed could have used its limited powers to ensure a closer examination of what was going on?
Mr Greenspan realises that something big has happened and describes it as a “once in a hundred years” event. But then, you do not get Alan Greenspans coming along every day.
FT.com / Comment & analysis / Comment – Greenspan’s sins return to haunt us.
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