Greenspan’s Defense

I just finished reading Alan Greenspan’s latest book on the financial crisis called The Map and The Territory. I really was hoping that the book would be his confession that flawed monetary policy led to a global financial crisis and how he learned all sorts of interesting things about interest rates in the process.. Unfortunately it reads more similarly to Hank Paulson’s memoir On the Brink for his unwillingness to take any responsibility for his decisions and for the absurdity of the excuses he offers.

In Paulson’s book he argues that it would have been illegal to have bailed out Lehman Brothers because they had capital rather than liquidity problems even though he had no problem bailing out AIG with bigger capital problems weeks later. Paulson’s memoir was at least so absurd that it was funny because it was filled with quotes like this:

“On October 30, I took the opportunity to deliver a pep talk to my staff , just before we began a lengthy strategy session in which I would lay out the assignments for the next few days. And of course everyone already expected they they were going to work all weekend. That’s what we did. I had to fly to Chicago with Wendy to babysit our granddaughter – but I, too, knew I would spend most of the weekend working.”

Greenspan didn’t even have funny tidbits about highly important babysitting gigs and fishing trips that required his attention in the height of the financial crisis. Greenspan directs most of the blame for the crisis on the chinese for saving too much money and driving down long term interest rates.

“In short, geopolitical events ultimately led to a fall in long-term interest rates and the mortgage interest rates which they were tied. That led, with a lag, to a global boom in home process”

Unfortunately he argues, there was just nothing he could have done about it.
“Some academics favored an incremental defusing of the bubble through a gradual tightening of monetary policy, but such incremental policies have never appeared to have worked in the real world. Even had we had the official data from 2005, there was little the Fed could have done to contain the rise in home prices”

It’s hard to imagine that higher short term interest rates wouldn’t have reduced the severity of the crisis. Much of the sub-prime mortgage mess is attributed to variable rate mortgages whose attractiveness was largely attributed to low short term interest rates. The share of adjustable rate mortgages in the total value of first mortgages sub-prime origination soared to nearly 62 percent by the second quarter of 2007. There is also the simple fact that low long term interest rates (which Greenspan says caused the housing bubble) are affected by the yield on short and medium terms bonds.

Greenspan should have rested his case with his hit track on Recession Sessions.