Greenspan Tries to Rewrite History of Housing Bubble

Alan Greenspan refused to acknowledge responsibility for the housing bubble again in a talk given at Brookings yesterday. It would have been helpful if the NYT had provided some additional history to point out to readers that what Greenspan was claiming was not true.

For example, Greenspan asserted that: "Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible. ....Assuaging their aftermath seems the best we can hope for.”

Rather than using the Fed's research and ability to shape public debate to warn of the bubble, Greenspan repeatedly insisted that there was no housing bubble. He even encourage homebuyers to take out adjustable rate mortgages at the end of 2003 when fixed rate mortgages were near a 50-year low. In fact, the Fed even published a study saying that there had been no run-up in prices -- rather the widely increase was attributable to measurement error.

Greenspan also bizarrely claimed that the people taking out adjustable rate mortgages (ARMs) to buy homes at bubble-inflated prices would have used fixed rate mortgages if ARMs had not been available. In fact, many buyers would not have qualified for 30-year fixed rate mortgages if banks had applied normal lending standards.

Given the enormous damage caused by the housing bubble and its collapse, the idea that the Fed could and should do nothing is bizarre. It would have been reasonable to present the views of an economist who could have explained how the Fed is not powerless to prevent an economic calamity.

--Dean Baker

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