Monday, December 3, 2007

“The Pope of the Fed” still proclaims infalliblity

Former Federal Reserve chief Alan Greenspan finally admit there’s a housing bubble. But, “me responsible?” No way.

Said the former Federal Reserve chairman: "Markets are becoming aware of the fact that the decline in housing is not stopping. . . . I have no particular regrets. The housing bubble is not a reflection of what we did, as it is a global phenomenon."

Greenspan's conclusion is not accurate. But before describing why, I find it interesting that he said the words "housing bubble." Recall that as the housing bubble was raging and he was still Fed chairman, he argued that real estate could not experience a bubble because all housing markets were local. He specifically cited the impossibility of arbitrage between Portland, Maine, and Portland, Ore., as though that was an impediment to a bubble.

In essence, Greenspan won’t admit that his policies “delocalized” the housing market, either, by artificially inflating the housing sector, which then brought in all the financial institutions who came up with the ideas for their wacky collateralized debt obligations.

Greenspan is now trying to pass the buck globally. More below the fold:

Now he's making the argument that not only is there a housing bubble but that it's been a worldwide housing bubble. Well, this is a rare occasion where he is right. It is a worldwide housing bubble. But that does not mean he was a hapless bystander as the bubble developed. Just the opposite is the case.

One reason for the global housing bubble is that the dollar has been the world's reserve currency, with parts of South America, the Middle East and the Far East linking their currencies to ours. As such, the weak dollar has been a conduit for spreading easy money globally. Therefore, although Greenspan did not directly cause the housing bubble in Europe, his pursuit of wildly indulgent monetary policies at home were transmitted abroad. That did not exactly hurt the development of a housing bubble there.

Exactly. Greenspan’s part in the eventual weakening of the dollar has helped export the larger American financial problems that stem from the housing bubble.

Meanwhile, Saint Alan chose to be a bubble-inflator and a false prophet, already a year ago:
On Oct. 9, 2006, at a financial conference in Calgary, Alberta, he said: "I suspect that we're coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out. . . . There is a good chance of coming out of this in good shape, but average housing prices are likely to be down this year (meaning 2006) relative to 2005. I don't know, but I think the worst of this may well be over."

It’s clear, based on his history, that Greenspan was blowing smoke up the housing market’s collective skirt.

Bill Fleckenstein concludes his column by telling us exactly what the Fed needs right now: A Paul Volker to make the country take its medicine.