Alan Greenspan's Irrational Exuberance

For those of you still paying attention to the awkward, self-serving denials of Alan Greenspan ponder this.

Mr. Greenspan’s primary defense for the Housing Bubble “not being his fault” is that foreign savers flooded the U.S. market with capital to finance mortgages. Supposedly this capital kept mortgage rates low and eliminated the Federal Reserve’s influence over those rates. It was these foreign-financed, cheap mortgages that caused the Housing Bubble.

Since when did the free flow of capital become a bad thing?

The Housing Bubble had been steadily developing since the mid-nineties. Prices, transaction volumes, leverage ratios, affordable mortgage usage, HUD directed Fannie/Freddie subprime expansion, etc… had already reached unsustainable levels when Mr. Greenspan started slashing interest rates. Of course, Mr. Greenspan can’t cite this as a defense because he would be admitting to having missed, ignored or tolerated the existence of a Housing Bubble prior to 2001 and having contributed to the mania portion of the event with his interest rate policies serving as an inflection point.

Mr. Greenspan’s attempt to attribute the source of the Housing Bubble to foreign-financed, low mortgage rates ignores the actual forces which distorted the market and inflated prices. In fact, mortgage rates are presently at the lowest levels in U.S. history. These rates are materially lower than those that existed from 2001-2005. If Mr. Greenspan’s obtuse explanation were in any way credible housing prices should be soaring. Instead, values are collapsing at the fastest rate in history.

Despite Mr. Greenspan’s protestations, traditional mortgage rates were largely irrelevant from 1995-2005 with respect to housing price appreciation. The Housing Bubble was perpetuated by the abusive availability and the unsustainable terms of Affordable Mortgages. People who should never have had access to mortgages received them. There was almost no financial impediment to buying a house thanks to no down-payment, interest-only, adjustable-rate mortgages.

Today, despite record low mortgage interest rates, credit availability is greatly reduced and marginal, effective mortgage interest rates are dramatically higher as rationality has returned to the market. Once upon a time Mr. Greenspan would have hailed a return to market rationality, now he seems singularly focused on concocting a fictional narrative about his role in Housing Bubble.