I have never managed to catch Greenspan in private in a place where I can hammer him on it.
I did talk to the late Ned Gramlich, Federal Reserve Governor pressing for more active Federal Reserve intervention to cool down the housing market in 2003-2004. Ned said that Alan's position was: (a) Stupid rich lenders make zero-down loans at teaser rates--and the people they lend to get to live in houses at low effective rents for three years, and then collect some cash if prices keep going up. It's not my job to protect stupid rich lenders from themselves. (b) The true losers are people who think that they have to buy in what they regard as overvalued markets, and buy and as a result are likely to lose their down payment equity when prices come down and everyone is forced to modify the principal down to fundamental market value. They simply should not buy if they think the market is overvalued: they should rent instead. (c) The lenders want to lend, the borrowers want to borrow. If the Federal Reserve gets in the middle we will be crushed by angry congressmen who want to know why those of their constituents who want to lend can't lend to those of their constituents who want to borrow. (d) The Federal Reserve has the tools such that, if it crashes hard, we can still keep the unemployment rate from rising by much in the aftermath. That's what Gramlich said Greenspan's view was in 2005. Greenspan did, I think, suffer from the economist's vice of believing in the market: that once housing prices crashed the market would quickly sort itself out: homeowners who were underwater would threaten to mail in the keys and go rent someplace else, banks anxious to avoid foreclosure costs would quickly write down mortgage principal values to levels that gave homeowners an incentive to stay in the house and take care of it, a bunch of bank shareholders would lose their money and a bunch of bank managers would lose their fortunes, the government would have to take over a few banks, but all in all the market would quickly move to a new post-bubble equilibrium without a big rise in unemployment. That proved to be totally wrong. The free market wasn't able to get the writedowns done by itself, and the Geithner Treasury was unable to figure out a way to use TARP money to grease the adjustment in the housing sector, and now we are in a big mess... Yours, Brad DeLong On Thu, Oct 21, 2010 at 10:00 AM, Dan Minette <danmine...@att.net> wrote: > This is reposted, since the original response went to just Brad, since he > was first on the reply list, which included Brin-L > > >I really wouldn't feed the troll any more, if I were you... > > I think I have a narrower definition of troll than you do. I accept that > folks can have understandings of the world that I see has having internal > inconsistencies. I think that John is not putting forth a false front; I > think he posts in good faith. So, I'll debate points until I find that I > stop seeing the debate going anywhere. > > Since you are in the discussion now, I'm curious about a couple things. > How > could people not see that housing went into a bubble. I knew they were > overvalued in many places before the bubble burst. I only saw the > conclusive evidence, the inflation adjusted house prices shot up 40% after > not varying by more than 10% over a century. I'm not an economist, but I > crunch numbers for a living, and that certainly looks like an anomaly. How > did Greenspan, who saw the stock market bubble, miss that one? And how did > folks miss the fact that the Risk Assessment Model was inherently flawed, > by > ignoring events with low historical probability (<2%) instead of using > Monte > Carlo techniques to include them properly. > > Dan M. > > > _______________________________________________ > http://box535.bluehost.com/mailman/listinfo/brin-l_mccmedia.com > >
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