Features

Why Greenspan blames Russia for the housing bubble

Promoting his new book on Fox Business News, Alan Greenspan once again refused to admit that the housing bubble was anything to do with his rate-cutting policy. Instead, he blamed the collapse of the Soviet Union...

There was an interesting interview with Alan Greenspan on Fox Business Network about housing, gold, and the lack of need for a central bank.

It appears that Greenspan has plenty of reasons for why the housing bubbles worldwide ever started and are now bursting.

This appears to be Greenspan's new MO. He's been traveling all over the country promoting his book, criticizing his successor, and pointing the finger at everyone but himself.

The Cold War and an overheated market

Greenspan is blaming the decline of the Soviet Union and the end of the Cold War for worldwide housing bubbles:

"It was a geopolitical switch in which market capitalism very quietly overtook central planning, and that created substantial booms throughout the world ...creating an excess of savings, which drove down long-term interest rates virtually everywhere. And virtually everywhere, it sprouted a housing bubble."

In essence, he wants us to believe that housing skyrocketed 10-plus years after the fall of the Soviet Union in some sort of delayed reaction, and that it was just by coincidence that this happened after the Fed slashed rates to 1%. Clearly, Greenspan is attempting to absolve himself of his role in the housing bubble.

It gets more interesting:

"Central banks gradually began to lose the power of affecting longer-term rates, as we demonstrated rather conclusively in 2004, when we raised short-term rates very rapidly and ended up with no increase whatsoever in long-term rates, and indeed, it stayed that way in 2005 as we continued to tighten."

Greenspan has selective memory. The Fed did not raise rates rapidly, as this testimony of Chairman Alan Greenspan on July 20, 2004, shows:

"In May, the FOMC believed that policy accommodation needed to be removed and that removal could be accomplished at a pace that is likely to be measured. At our meeting last month, the FOMC raised the target federal funds rate from 1% to 1.25%, and the discount rate was raised commensurately. Policymakers reiterated that, based on our current outlook, the removal of accommodation would likely proceed at a measured pace."

And Greenspan kept the 'measured' pace at a quarter point per meeting for 17 consecutive meetings. It was perfectly measured, and certainly not the "very rapid rise" he talked about in the Fox interview:

"What that demonstrated pretty much around the world is that central banks no longer have the capacity to significantly impact longer-term rates, and it's the longer-term rates that create bubbles."

The rebuttal to this nonsense is that by lowering interest rates to 1%, all sorts of speculative lending took place based on the spread between banks' ability to borrow at 1% and lend at a higher multiple. It is highly unlikely the market would have lowered short-term rates to 1% or kept them there for long if it did.

Greenspan either is being disingenuous or is a complete fool to put forth this set of arguments on the housing bubble.

Do we need a central bank - or a gold standard?

Fox: "So why do we need a central bank?"

Greenspan: "Well, the question is a very interesting one. We have, at this particular stage, a fiat money, which is essentially money printed by a government, and it's usually the central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or currency board or something of that nature, because unless you do that, all of history suggests that inflation will take hold with very deleterious effects on economic activity...There are numbers of us, myself included, who strongly believe that we did very well in the 1870-1914 period with an international gold standard."

Fox: "We did well without the Federal Reserve. People forget that."

Yes, they do. And that last paragraph was one of the few things Greenspan has ever said that made any sense.

By Mike 'Mish' Shedlock for Whiskey and Gunpowder

Whiskey & Gunpowder is a free, twice-per-week, e-mail service for more from the team, go to https://www.whiskeyandgunpowder.com

Recommended

Are recession fears justified? Maybe it’s time to look on the bright side
Economy

Are recession fears justified? Maybe it’s time to look on the bright side

There's a lot to feel nervous about right now, and many people are worrying about an impending recession. But it's by no means certain, says John Step…
28 Jan 2022
No easy answers to Europe’s gas crisis
Energy

No easy answers to Europe’s gas crisis

Europe’s gas crisis is a long way from over, with some analysts thinking that gas prices could remain twice as high as normal until 2025.
28 Jan 2022
The Federal Reserve has turned inflation-fighter – how do you invest now?
US Economy

The Federal Reserve has turned inflation-fighter – how do you invest now?

The US Federal Reserve has become much more hawkish on inflation and less concerned with the markets' reaction to rising interest rates. John Stepek e…
27 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022

Most Popular

Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022