Alan Greenspan Embarrasses Self with Feeble Defense of His Failed Philosophy and Policy

Alan Greenspan refuses to go to pasture quietly; therefore, bloggers like me need to remind everyone that Alan Greenspan is a dangerous fool who plunged the world economy into a near catastrophic depression and caused properties like today's to become elevated in price far beyond any rational measure.

Marquee at Park Place at Night

Irvine Home Address … 3131 MICHELSON Dr 1702 Irvine, CA 92612

Resale Home Price …… $899,999


When you're a disgrace to the human race?

No committment, you're an embarrassment,

Yes, an embarrassment, a living endorsement,

The intention that you have booked,

Was an intention that was overlooked.

This is a serious matter,

Too late to reconsider,

No one's gonna wanna know ya !

Madness — Embarrassment

Alan Greenspan is an embarrassment–an embarrassment to himself and to everyone who believed in him and his policies. If there is any one individual that deserves the most blame for the Great Housing Bubble, it is Alan Greenspan.

In the post, I Pity Alan Greenspan, I recapped the status quo:

When Alan Greenspan stepped down as Federal Reserve Chairman in 2006, he was highly regarded by most experts and the wider general public as the man responsible for over 20 years of economic prosperity. Guided by his core beliefs in limited regulation and the wisdom of market participants to limit their own risk, he pursued policies during his tenure that have since proven to be disastrous.

If Alan Greenspan had died shortly after leaving office, he would have perished in ignorance of the problems he created. He would never have known the beating his professional reputation would take when the economic system he helped promote came crashing down. Ken Lay died before he could face justice, and his wife got to keep all the money. If Ken Lay had lived on, he would have faced nothing but suffering in his later years. Like Richard Nixon before him, Alan Greenspan will live on to wrestle with his failures, and also like Nixon, Greenspan will likely spend the rest of his life trying to convince a dubious public that his actions were justified and what he did was not wrong.

Alan Greenspan has publicly admitted to making some mistakes. His feeble defense of his actions usually center on the idea that the problems that brought down our financial system were too big for the FED chairman or anyone else to prevent. This is bullshit, and he knows it. The root of the problem is in the deeply held philosophical beliefs that he acted upon his entire career.

Alan Greenspan strongly believes the participants in the economy are aware of the risks they are taking on, and they are carefully managing those risks. In his world, government regulation to curb the excesses is an unnecessary hindrance to economic growth. Like Ronald Regan and the entire Conservative movement that he inspired, Alan Greenspan believed that government is not the solution, it is the problem.

The failures of Alan Greenspan and those who failed to regulate our financial markets have lead to the economic catastrophe we are facing. Everything Alan Greenspan believed his entire career was wrong. He knows that now; although, he will likely spend the rest of his life trying to deny it. He will live out his life in disgrace partly responsible for the suffering of millions of people around the globe.

I don't feel sad for him. I chose the word "pity" carefully. To feel sadness for someone's actions, you must feel compassion for their plight. Pity masquerades as compassion, but there is a lack of empathy in the emotion of pity–A lack of empathy often caused by the fact that certain tragedies are self-inflicted. The attitudes, beliefs and actions of Alan Greenspan caused his own downfall. I do not feel sad for him; I pity him.

For more information, please read Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve

In case anyone forgot, Alan Greenspan denied the existence of a housing bubble as evidenced by articles like this one from 2004: Fed's Greenspan Doubts 'Housing Bubble' Thesis.

"A number of analysts have conjectured that the extended period of low interest rates is spawning a bubble in housing prices in the United States that will, at some point, implode," Greenspan said. "Their concern is that, if this were to occur, highly leveraged homeowners will be forced to sharply curtail their spending.

"To be sure, indexes of house prices based on repeat sales of existing homes have outstripped increases in rents, suggesting at least the possibility of price misalignment in some housing markets. A softening in housing markets would likely be one of many adjustments that would occur in the wake of an increase in interest rates.

"But a destabilizing contraction in nationwide house prices does not seem the most probable outcome. Indeed, nominal house prices in the aggregate have rarely fallen and certainly not by very much," Greenspan said.

Often public officials have to make statements they don't really believe in order to prevent panic in financial markets, but the discourse above is outside what would be required as a vague Greenspan-speak; The comments display a deeply held and woefully wrong Weltanschauung; in short, he really believed it.

In an astonishing turn (not really), Alan Greenspan is defending his actions, Rich People Things: Alan Greenspan's Window Is Always Open. The author takes him to task:

Well, this is awkward. Alan Greenspan, hailed for most of his nearly two-decade run as chairman of the Federal Reserve as a market savant of the first order, is now assailed from all sides for the Fed’s apparent role in overinflating the country’s garish housing bubble. The charge is a fraught one, reports Fortune magazine’s Geoff Colvin, since should it stick, it will fundamentally reshape perceptions of Greenspan’s legacy at the central bank. Already the sweep of the emerging indictment is such, Colvin writes, that “four years after leaving the Fed as the Greatest Central Banker Ever, the longest-serving chairman, the Maestro, Alan Greenspan is the designated goat."

But Greenspan is not a goat who will go quietly into the good night. He takes vigorous issue with the criticism of Fed policy that is now fueling all the anti-Greenspan rancor: that from the pivotal years of 2002 to 2005, when mortgages remained artificially low and housing prices continued to drift ever higher above the realm of consensual reality, the Fed failed to put the brakes on the downward drift of interest rates. This critical oversight, Greenspan’s critics charge, meant that the Fed kept pumping the derivatives-fed fiction that no serious risks were accruing in the market long past the point of any empirical support.

Greenspan’s rejoinder is that the true causes of the 2008 housing crash were global—that prices kept spiraling upward because of a global savings glut, which channeled capital’s insatiable quest for exotic new forms of market expression into the opaque wonderland of securitized debt. Emerging market economies such as China kept unleashing new investments that, Colvin writes, “naturally pushed interest rates down globally—thus the decoupling of mortgage rates from the Fed funds rate, and the global nature of the housing boom.”

To detractors who point out that this upsurge of global capital didn’t really so much, you know, exist, Greenspan has an elegant rejoinder. As Colvin summarizes, it goes as follows: “You have to look at intended saving and intended capital investment, not actual saving and investment. After all, saving and investment by definition will always balance.” The mere existence of an overabundance of capital was enough, in other words, to prompt markets across the globe to keep their mortgage rates artificially low—thereby permitting housing prices across the globe to ratchet up ever higher.

Do I need to point out that Greenspan's look-at-intent-rather-than-reality defense is bullshit–Embarrassing bullshit? The kind of bullshit that makes you cringe and feel so sorry for the man that you want to run away and hide for him. An embarrassing bullshit that doesn't even pass the giggle test. Perhaps there is a special island where we can put David Lereah and Alan Greenspan to save themselves from further embarrassment. They should get Lost.

If it were only embarrassing, it could be easily forgotten and dismissed, but this fool still has the ability to influence public policy, and if our legislature or bureaucrats believe him, we may repeat Greenspan's grievous gaffes. Hopefully, wiser men (like Paul Volcker) will prevail and Greenspan's debt disease will be cured. I have my doubts.

Who should lose?

Alan Greenspan believed in the ability of financial markets to properly disperse and discount risk. Who do you think he saw as absorbing $900,000 losses on units like today's featured property?

Marquee at Park Place at Night

Irvine Home Address … 3131 MICHELSON Dr 1702 Irvine, CA 92612

Resale Home Price … $899,999

Income Requirement ……. $187,416

Down Payment Needed … $180,000

20% Down Conventional

Home Purchase Price … $1,752,500

Home Purchase Date …. 2/17/2006

Net Gain (Loss) ………. $(906,501)

Percent Change ………. -48.6%

Annual Appreciation … -16.3%

Mortgage Interest Rate ………. 5.05%

Monthly Mortgage Payment … $3,887

Monthly Cash Outlays …..….… $5,740

Monthly Cost of Ownership … $4,400

Property Details for 3131 MICHELSON Dr 1702 Irvine, CA 92612

Beds 2

Baths 2 baths

Home Size 2,062 sq ft

($436 / sq ft)

Lot Size n/a

Year Built 2006

Days on Market 3

Listing Updated 2/10/2010

MLS Number U10000651

Property Type Condominium, Residential

Community Airport Area

Tract Marq

According to the listing agent, this listing may be a pre-foreclosure or short sale.

Penthouse Suite…2 bedroom plus den. Highly upgraded…ultra luxury with 24 hour concierge. HOA dues were just lowered below $1,000. Unit comes with 2 parking spots next to elevator…

ultra luxury? Where do we go from there? Mega luxury? Super-duper luxury?

For your ultra mega super-duper luxury home, you get two assigned parking stalls? For $1,000 a month HOA dues, I should be unconcerned where the staff parks my car… Oh, wait. You mean I have to park it? What are residents getting for $1,000 a month? Hosed.

42 thoughts on “Alan Greenspan Embarrasses Self with Feeble Defense of His Failed Philosophy and Policy

  1. Freetrader

    I think Greenspan is being given excessive blame in direct coorelation to the excessive praise he received during his tenure as Chairman of the Fed. There is absolutely no doubt that he completely blew the housing bubble call. That does not mean that his entire philosophy is necessarily garbage. Reagan, like Thachter in Britain, was fundamentally correct in his assessment that the economy was overregulated and that there are times when government should get out of the way. We did have a great 30-year run of prosperity. Inevitably, the American ‘vitamin syndrome’ eventually took over — if cutting tax rates from 60% to 40% were good, then cutting them to 15% must be even better! If deregulation of the airlines worked (and it did) then deregulation of everything would be even better, etc. Of course, some regulations are necessary. Removing regulations, like cutting taxes, becomes self-defeating after a while. But more fundamentally, when you have the government guaranteeing the debts of the private sector through Freddie Mac and Fannie Mae, the whole concept of deregulation loses any meaning.

    As Nassim Nicholas Taleb predicted long before the crash, what happened was that the managers of an increasingly financial integrated world were not able to properly assess the risks they were running. If you ‘hedge’ a risk with a counterparty, there is still a risk of default, which was discounted practically to zero by much of the banking community. Add to that the moral hazard created when a bad loan would not affect a bank’s portfolio, but became a community problem through CDO’s, and you had a financial meltdown in the making. But I am not sure how you could prevent idiots like Dick Feld from making the same mistakes on a different set of risks the next time around, unless you limit the size of the financial institutions. The recent liability tax proposed by the Obama administration may be a good start. I agree that if you reduce the cost of money, people will take the money and do stupid things with it, and Greenspan should have known better. But I don’t think you can blame Greenspan or even use him as a poster boy for the mistakes that permeated an entire financial system.

    1. alan

      Why blame Greenspan?, after all, he and his cronies were really devotes of the philosophy of of the objectivist libertain AYN RAND. If it hadn’t been for her writings, the deregulation movement would not have had the momentum it did. Maybe we should ban Ayn Rand books such as The Fountainhead and Atlas Shrugged from public school and libraries.

      1. Geotpf

        Aw, but without Ayn Rand, we wouldn’t have the excellent Bioshock series of videogames. So she has that going for her at least. 😛

  2. Chris

    This was sold for $1.7 in ’06? Are you effing kidding me?

    In-effing-credible. I’m speechless.

    Don’t get me started on $900k.

    1. Freetrader

      For two bedrooms! WTF!

      Rumor has it that the former President of Taiwan bought a couple of condos in this building with his ill-gotten gains. Since he is current in prison under a life sentence, I wouldn’t expect to see him there any time soon.

  3. Stock Investor

    “Alan Greenspan is an embarrassment …”

    Nope, Alan is scapegoat. It is tradition to blame mysterious evil genius.

    The problem lies in system, and nobody wants to fix it.

    1. IrvineRenter

      I argue that Greenspan and his fellow anti-regulation believers proactively broke the system. They created the conditions under which our debt monster got out of control. Greenspan embraced 25 years of moral hazard through the “Greenspan put” and fostered deregulation, or more specifically in the case of derivatives, unregulation of a very dangerous market.

      1. norcal

        Well, OK, but does this exculpate the Senate Republican’s refusal to pass financial reform? I think not. Blame is fun, but where do we go from here? Write your Senator and demand finance reform!

        1. Geotpf

          Well, the Senate, being the fun place that it is, has 59 Democrats and 41 Republicans right now, after the election in good ol’ Massachusetts. Since the Republicans vote in total lockstep about 99.9% of the time, including on filibusters (meaning you only need, tada, 41 Senate votes to block pretty much any bill), this means literally NOTHING of significance will be passed from now on. That one Senate flip ensures gridlock and status quo for many, many years to come, especially since it looks like the Dems will lose a few more seats come November (but not their majority).

          That is, don’t bother writing to DiFi or Boxer about this or any other issue; complete waste of time. There will be no new significant legislation on any issue from now until one party has all of the following: 60+ Senate seats plus a healthy majority in the House plus the presidency, except for silly “bipartisan” bills, which will usually be muddled messes that merely paper over whatever the problem is. Don’t expect President Palin (or Romney or Huckabee) any time soon either-Obama will almost certainly win re-election if any of those are the choices.

    2. Walter

      “The problem lies in system, and nobody wants to fix it.”

      Agree with you here. The Greenspan put has now become the government put. He many have got the ball rolling, but there is a whole team pushing it now.

  4. lowrydr310

    I received a nice letter from Citibank this past weekend, informing me that my credit card terms are changing. I’m now being charged a $60 annual fee, but they’ll kindly refund my annual fee if I make $2400 in purchases on the card each year. Isn’t this wonderful? I’ve been a good customer for years, paying my balance off in full each year, never missing a payment, and this is how they reward me? I called to opt-out and cancel my account, and they made no effort to retain me as a customer.

    I have an American Express card and a Discover card, neither have any annual fee or any ridiculous spending requirement.

    1. lowrydr310

      “paying my balance off in full each year”

      D’OH! I meant to just say each “month” – where’s the ‘edit post’ feature when you need it?

      1. BeachRenter

        Sadly this kind of responsible behavior makes you a BAD customer in their eyes. You should have spent the last 7 years running up and maintaining high CC balances so they could hit you with high interest rates and assorted fees and charges. Paying off your card every month, what are you thinking? Don’t tell me you are paying down your mortgage too. What is this great debtor nation coming to? Their senses?

    2. Walter

      Lets not forget that they are loaning money. It is a service that we are better off not needing, in which case, big deal if they cut our limit.

      In the case you do need to borrow, your are riskier and they are protecting themselves.

      I am all for regulation to make disclosure clearer so people are not taken advantage of, but beyond that, maybe we will be better off if they cut our credit and we as a people can not get so deeply in debt.

      I know how it feels, my AmEx was cut from a $20,000 to $10,000 limit. I will deal.

    3. Geotpf

      There was a recent change in the law regarding how banks can raise fees, what type of fees they can charge, etc. Lots of banks increased fees to beat the law going into effect.

  5. wheresthebeef

    Alan Greenspan definitely needs to take some of the blame for this whole mess we are in. After the 9/11 attacks, interest rates were brought down and kept down for too long. This just added fuel to the fire for the housing bubble. Aggressive rate increases should have taken place in 2003…doing nothing for another 3 or 4 years was disasterous.

    Regarding the North Korean Towers. HOA now less than 1000 per month. WTF…for that amount they better offer weekly hooker and blow parties.

  6. Anonymous

    Don’t feel too sorry for him – he did manage to publish his best selling “Age of Turbulance” book before the downturn.

    Actually, maybe that’s not such a bad title – in a “i’m forecasting you’re going to feel like puking” kind of way.

  7. Calpolymom

    I believe there is an error in this listing – it’s marked as being in the Irvine school district but it actually belongs to Santa Ana Unified. Not that anyone with school-age children would want to live here!

    1. IrvineRenter

      I didn’t see that in the listing. This is certainly in the Santa Ana school district. I know because I lived in Villa Siena across the street at one time, and it too is in the Santa Ana school district.

      1. Swiller

        You know, I have worked in Irvine for 23 years and I didn’t realize they had any Santa Ana school district zones….that is incredible, but then again, I haven’t even seen *any* children coming in or going out or even walking around the NKT’s.

        I have seen a few mothers walking babies down Carlson. Is that whole area from Campus/Jamboree to Main/Jamboree Santa Ana School District?

  8. tenmagnet

    Wow, a staggering loss in a relatively short period of time.
    Going from $1.752M to $899K in 4 years is a huge haircut

    1. Geotpf

      The real question is, how much farther will these fall? What would it cost to rent one of these? I imagine a lot less than payments on a $900k loan plus taxes plus insurance plus $1k a month on HOA fees.

  9. Soylent Green Is People

    The majority of original buyers were speculators – Real Estate Agents and other assorted fools – so my heart does not weep when I witness this epic carnage… It celebrates.

    $1.7M for an apartment. This isn’t Manhattan. You could have purchased a nice ocean view Laguna Beach home for $1.2 in 2006, and had money left over for a helicopter if you needed to run to the airport quickly.

    Go through the mind set of someone who purchased this place. Did they think they could spin this to a bigger fool? Did they think it would continue to appreciate (while other towers were rising at the same time…) What was the motivation of a buyer like this. You cannot say it was because of it’s “desireable location”. Other than greed, what purpose did this purchase represent?

    My .02c

    Soylent Green Is People

  10. NOT

    Ok, slightly off topic but this weekend in IHB News IR introduced me to Coldplay’s “Strawberry Swing”. GREAT SONG. Anyhow, the vid for it was interesting but I would like to suggest a change in the Vid link. It seems this is the “official” version and it also seems more in line with houses being under water 🙂

    1. es

      IR, you never gave us a report of that wine and cheese event at the other disastrous high rise you chronicled last week…

  11. NOT

    IR I have an bank sale question: If one buys a property all cash, to live in or rent out. How long until one can “extract one’s equity” and get a loan out for it?

  12. EconRules

    “Like Ronald Regan and the entire Conservative movement that he inspired, Alan Greenspan believed that government is not the solution, it is the problem.”

    If Alan truly believed what you had written, he would not have kept the interest rate artificially low for so many years. Instead, it would have risen steadily according to inflation. He did believe in regulation, and acted completely against free market principles. THAT was his problem, not the other way around.

    1. Freetrader

      I agree. If anything, Greenspan’s mistake was to give in the populist pressure (which by the way, means all of us) to keep rates low and keep everyone happy. It has hardly his slavish adherence to the priciples and Ann Rynd channeled through Ronald Reagan that caused the blow up. He once described his job as being the guy who has to ‘take the punch bowl away once they party really gets going’ and in that he failed spectacularly. Still, the housing bubble was the lesser of evils — the worse problem was the inability of the entire system to understand the risks they were collectively taking. They developed models that basically concluded that the more money lent (and then sold off via CDO’s) the more profit they would make, regardless of credit quality. Greenspan should have had a role in calling BS on this, but it is not his primary job to assess credit quality for the banks themselves. If you need to pick a villian, it is the management of the banks and their slavish adherence to flawed risk management analyses.

      1. LC

        Jeeze — he managed to jack up rates close to 9% when Al Gore was running for president. Funny that. He thought nothing of causing a recession then. Of course nobody even mentioned bail outs when it was just California industry that was collapsing. Could you people really have such short memories?

        1. Freetrader

          “You People” Who are you, Ross Perot? Who are “You People”, I wonder?

          Actually, the economy was booming and if anything, too frothy in 2000, and Greenspan was doing exactly the right thing — trying to take the edge off it. I don’t suppose “You People” remember that, do you?

  13. IrvineRenter

    A timely story:

    Who is to Blame for the Housing Bubble? Is Alan Greenspan a Convenient Scapegoat?

    There is no question that the housing bubble made multi-millionaires, and even billionaires of a select few who played the market right, but the majority lost almost everything when the bubble burst. In the game of assessing blame, Alan Greenspan’s name comes up often as bearing the responsibility for the bubble and the disastrous aftermath of the bubble bursting. So, who’s to blame?

    The truth is that there is ample blame to go around – and around and around. When the crisis began, the convenient scapegoats were mortgage brokers who were said to be getting filthy rich off unqualified home buyers by putting them into ridiculous loans they could never hope to pay off, and charging exorbitant fees for those loans.

    Again, there is some truth here. There were many very unethical mortgage brokers who preyed on the poor, the minorities, and made a lot of money on people who never should have been able to buy a house. But most mortgage brokers were just trying to make a living. Yes, they originated bad loans, but they couldn’t have done that if those loans hadn’t been available, and heavily promoted.

    So, were the lenders, banks, hedge funds, private money sources, and investors around the world responsible? Everyone wanted in on the money to be made during the housing boom. Home values were rising so fast it was almost shocking. So, everyone jumped on the “find a way to lend to anyone who wanted a loan” bandwagon. If the loan products (types of loans) had never been made available, people with dismal credit and no cash would never have been able to purchase the houses they ultimately lost or are still losing.

    Let’s not forget real estate agents who asked for pre-qualification letters on home seekers, then showed these same people homes that were priced much higher than they could possibly afford. A really well connected mortgage broker could find a loan for almost anyone, if the borrower was willing to pay the rate and fees. But then the insanity escalated.

    During the housing boom sub prime lenders found investors who were willing to lend to these unqualified buyers at rates that were even better than prime borrowers were being quoted – and so the sub prime boom got out of control. Even prime borrowers wanted those better rates, so settled for sub prime, terrible loans to get the best rates out there.

    So, should we blame all those people who bought homes, knowing they were a poor risk, with poor credit histories, high debt, and no cash to invest? Of course they wanted in on the housing market. They not only wanted a part of the American dream. It was also a way to take part in the “make money fast” game. Housing has historically been seen as one of the safest investments, and a way of making money (building equity) with low risk. It wasn’t just the housing market that was booming. The entire economy was booming. Equity in homes was easily converted into expensive cars, big screen televisions, and almost anything else people desired. No one wanted to be left out.

    But let’s not forget about Alan Greenspan. Like most Federal Reserve Chairmen, Greenspan is a brilliant man, but he didn’t see what was happening back in 2002. As is so often the case, he was late to react before he started lowering rates, and then overzealous when he started raising rates. He never seemed to have the patience to wait to see how the market reacted before he acted again.

    Greenspan says that the bubble was created by an excess of savings around the world and the fact that countries, such as China, jumped on the “capitalism” bandwagon. He says it was that glut of money that pushed rates, including mortgage rates, ever lower and created the boom. This sounds good, in theory, but mortgage rates are at historic lows now, and people aren’t out buying up homes like they were during the boom. Also, savings rates are higher now than they were during Greenspan’s era.

    Greed creates bubbles – and everyone jumps on bubble bandwagons because everyone wants in on easy money. We have witnessed so many bubbles over the last 20 years. And, no doubt we will see more in the future, no matter how hard the Feds, the government and other regulatory agencies try to stop them. Just observe what has happened recently to the price of gold. Look what happened to the price of oil last year. Remember the boom in the 90s?

    In summary, Greenspan contributed to the housing boom, but so did everyone else with money to contribute. Will we ever learn that bubbles always burst, with extreme pain to follow?

    1. Freetrader

      Ah yes, Jacob Weisberg, that astute observer of financial trends. That same month he famously wrote that if Barack Obama loses the election it can only be due to racism. This month he declared that failure to pass a health care bill is evidence that American Democracy doesn’t work. Not one for a subtle or nuanced argument, is David.

  14. ssunnys

    I have been suffering from a terrible credit card scam made around me by a travel and business site. Its so bizzare the way these crimes are treated and talked about. Thanks for this kind of information. I have lost my faith on online security though.
    uk mortgage

  15. jimfromJaxFla

    The Epicenter, ground zero, the true decoupling of finacial regulation was the elimination of the firewall of the “GLASS- STEAGLLE ACT” of 1933 by passing the “Graham Leach Blily ACT” of 1999…

    Alan Greenspan PUSHED this for all it’s worth..
    thereby creating conditions like the 1920’s..
    Oh, He know full well what he was doing..

    A Libertarian in the 60’s, he was brought up to the mountain and told he could have all the world if he worshipped the $$$ Masters….
    pitiful.. so sad…

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