Contrarian Chronicles (from CNBC) Don't take mortgage advice from Alan Greenspan
The Fed boss says homeowners should switch to adjustable-rate loans and save the difference. His record is full of dangerous moments like this when heâs been way, way off. By Bill Fleckenstein Last week, Alan Greenspan was a study in contradiction. On Monday, he extolled the virtues of the levered-up homeowner to a credit union conference. The next day, in a speech to the Senate Banking Committee, he was singing a different tune altogether. Fannie Mae and Freddie Mac, the giant providers of mortgage capital, he warned, "are expanding at a pace beyond that consistent with systemic safety," and that "preventative actions are required sooner, rather than later." For a Federal Reserve chairman who has demonstrated that he couldn't identify reckless behavior if it ran him over, it was rather surprising to hear him chide Fannie and Freddie for their recklessness. (I should state, however, itâs an opinion I tend to share.) His scolding might better be directed inward. What he advocated last Monday should send cold shivers down the spine of anyone so engaged. I already thought that what was going on in real estate was dangerous, but what he now cites as a good thing is not only dangerous, it will be disastrous -- guaranteed. All hail, Al's paper trail Before quoting from the above, I would just note that Greenspan's latest comments reminded me of a speech he gave on March 6, 2000, which I have dubbed "An Ode to Technology." In the speech, he waxed on about the wonders of technology and how it had brought us a new era and all that other stuff. Folks may not remember that date, but it was four days before the Nasdaq Composite (COMPX) hit its all-time high of 5,048.62. Despite the recovery over the past year ago, the composite is still down nearly 60% from the March 2000 peak. This is not the first time Easy Al has been way off. On March 7, 2000, I wrote a column called âAlan Greenspan: Friend or Foeâ that chronicled some of his prior quotes, speeches and the like. It includes his Jan. 7, 1973, utterance (right before the recession that ranks as our worst, at least until we get through the one we're in but haven't completed): "It is very rare that you can be as unqualifiedly bullish as you can be now." That, coupled with his ode to technology and cluelessness about bubbles (which folks have seen real-time), is a pretty fair indictment. And, there are other examples prior to his latest "Ode to Real Estate." For instance, in 1984, he wrote a letter to Edwin Gray, then-chairman of the Federal Home Loan Bank Board, advising the regulator to exempt Charles Keating's Lincoln Savings & Loan, a Greenspan client, from harsh federal regulations about its investments. He told Gray he should "stop worrying so much" about such things as junk bonds, and that "deregulation (of the savings & loan industry) was working just as planned." Lincoln Savings failed rather spectacularly a few years later. And itâs worth noting that within four years, 15 of the 17 thrifts he mentioned in this letter were broke, costing the old Federal Savings & Loan Insurance Corp. some $3 billion. What if adjustable-rates ratchet up? Now onto his latest comments. The first was set up in a rather glowing Wall Street Journal article by Greg Ip on Feb. 24. Called "Fed chief questions loan choices," it begins: "In a rare evaluation of interest-rate options that households face, Federal Reserve Chairman Alan Greenspan questioned whether American homeowners are well served by popular fixed-rate long-term mortgages." I realize that fixed-interest-rate mortgages tend to have slightly higher rates than adjustable-rate mortgages (ARMs). Unless one either believes rates will collapse or plans to move fairly soon, however, fixed-rate mortgages are always the right way to go. You know what you're getting into, so you're not gambling with your house payment. And of course, if rates drop, you can do as everyone has done: You can refinance. The notion of the whole country piling into ARMs when rates are at multi-decade lows is a truly destabilizing concept to contemplate. What happens if rates go up (because my view is incorrect) and the economy roars ahead? Twisted logician makes short shrift of bankruptcy Turning to a more objective analysis in The New York Times of Feb. 24, titled "Greenspan says personal debt Is mitigated by housing value," I note some even more outrageous comments. (I would call them guffaws, were it not so serious.) "Bankruptcy rates are not a reliable measure of the overall health of the household sector,â Greenspan said, âbecause they do not tend to forecast general economic conditions." (The emphasis is mine.) So, the fact that we have had record and near-record bankruptcies in the last couple years is immaterial, since bankruptcies donât forecast the future! Similarly, he reached into his linguistic bag of tricks to say why homeowners' increased leverage doesn't count: "An extended period of low interest rates and extra cash from mortgage refinancing has given borrowers flexibility (again, my emphasis) to better manage their debt.â So you see, this cash-out-mortgage-facilitated debt assumption is termed "flexibility" on his part, not an increase in leverage. Rather than fun with numbers, he has fun with definitions. The Times article then paraphrases him thusly: "Mortgage refinancing and the rise in home values have helped to bolster economic spending in economic hard times, as well as better periods." That is, of course, what has happened, as folks have groped around to get through the aftermath of the 1990s stock market bubble. We have postponed the inevitable via this leveraging of home values and aggressive lending tactics to keep the housing market alive and percolating. But we are running out of steam. 'Assets are contingent; debt is forever' Now think back to what Easy Al had to say about Keating's Lincoln Savings and other S&Ls. The chairman has forgotten something that everyone who went through the period should have learned: Assets are contingent; debt is forever. Granted, folks get around that pretty easily these days with the bankruptcy laws but -- oops -- we don't have to talk about that because it doesn't mean anything, because it's not a forecasting tool. So the most irresponsible central banker in the history of the world created the biggest bubble in the history of the world, which had disastrous consequences for the stock market and the economy. In order to ameliorate that, he has created bubble-like conditions and absurd financing schemes in real estate. Meanwhile, we've seen an enormous concentration of risk develop inside the financial system: We are down to just a handful of big banks and government-sponsored entities that are using his other favorite toy, derivatives, to theoretically manage away all their risks. Fed prudence takes a powder The summation of these variables has only increased the risk of something bad happening. And, of course, that risk has been heightened by the tanking of the dollar. The dollarâs decline has been promoted by Greenspan's irresponsible policies and attempts to continually bail out his most recent mistake. He has been doing this serially since junk bonds and bad lending nearly took down the financial system at the end of the 1980s and wiped out the savings and loan industry in 1990-1991. I believe we are at the end of the string, and things are in the process of slowly deteriorating once again. The pace of that deterioration may pick up speed over the course of the year. Perhaps we will look back on the speech Greenspan made last week and say that the Fed chairman in essence nailed the top of the housing market -- just as he did with technology in 2000 and the economy in 1973. And heâs probably just as wrong about what happens next. Bill Fleckenstein Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckensteincapital.com site. JD
