If a lie is repeated often enough it becomes the truth, and there are few better examples than the tar and feathering of Alan Greenspan for his purported role the housing and financial crisis. But the preponderance of evidence suggests his culpability is limited or non-existent. In other words, Greenspan’s legacy was tarnished by events out of his control.
The predictable narrative by lazy financial pundits goes as follows: Greenspan lowered rates too low, and kept them low for too long, causing a housing bubble that imploded under his watch. Yes, Greenspan did lower interest rates from 6.5% in 2000 to as low as 1% in 2004, but what is ignored by the financial media is that Greenspan actually raised rates many times in the 90′s, especially in 1999, to quell the exuberance in the stock market and economy as shown below:
One could in fact argue he was too hawkish because by 2000 the economy would enter a recession as the dotcom bubble burst. But the fact Greenspan raised rates in the 90′s, and then later between 2004-2006, is ignored by the media, who keep repeating the narrative that Greenspan was somehow this ‘great blower of bubbles’. And, of course, Greenspan did warn of irrational exuberance in 1996, which went unheeded. But no one got mad when tech stock fells, but when housing prices fell everyone brought out the pitchforks and pointed them at him.
But did Greenspan leave rates too low for too long? The consensus is he did, but one must understand that lowering interest rates in response to recession is conventional monetary policy, and then 911 exacerbated things. The 2003-2007 economic expansion, with the exception of the housing market, was tepid and inflation was low, so it’s not like the economy was overheating. Maybe he should have only lowered them to 2%; however, in the grand scheme of things it would not have mattered, as the seeds of the subprime bubble were planted in the 90′s.
As explained in an earlier article Misconceptions About the 2008 Financial Crisis, the origins of the subprime crisis date back to the early 90′s when lending standards under Clinton were relaxed to boost home ownership:
The Department of Housing and Urban Development (HUD) loosened mortgage restrictions in the mid-1990s so first-time buyers could qualify for loans that they could never get before. In 1995, the GSE began receiving affordable housing credit for purchasing mortgage backed securities which included loans to low income borrowers. This resulted in the agencies purchasing subprime securities.
As shown above, not surprisingly, the subprime market did indeed grow, from $50 billion to $150 billion from 1994 to 1998, and, notably, this occurred as interest rates were rising. High interest rates between 1998-1999 did not reverse the subprime boom. The explosion of the subprime market between 2002-2006 was a 200% increase, which is actually the same rate of growth from 1994-1998. One could argue that the second wind in the subprime market was fueled not by low interest rates but by ‘animal spirits’ and money flowing out of tech stocks into housing. Keep in mind the subprime market boomed in the 90′s, when rates were high. When the housing market popped, a lot of borrowers found themselves immediately underwater, and low interest rates would not have mattered – indeed, they didn’t as the subprime market failed to recover despite interest rates remaining at 0% since 2008. Nearly a decade later, many housing markets are still well below their 2006 highs.
Here is a chart of national home prices vs. the 10-year treasury bond, which is a good proxy for mortgage rates:
The the indictment against Greenspan is predicated on the dubious link between low interest rates and housing prices. As you can see above, further weakening the case against Greenspan, housing prices were stagnant between 1982 and 1997 as rates fell considerably. And despite rates surging from 2% to 14% between 1950 and 1982, the housing market did not fall. Given the tenuous link between interest rates and home prices, overall, the 2000′s housing boom was an extreme outlier that Greenspan couldn’t have possibly fomented, foreseen, or reversed – and this is ignoring the role played by the Clinton administration, which obviously contributed to the boom.
To anyone who has studied the data, this is self-evident, but facts tend to get lost in the narrative.