from Mike Licht (flickr)

Alan Greenspan has released a paper (.pdf) discussing the causes of the Great Crash of 2008, and the role of the Federal Reserve Board in that disaster. Unsurprisingly, he says there was nothing the Fed could have done to stop it. Equally unsurprisingly, he parrots a right-wing talking point, that the massive subprime mortgage debacle is the fault of government affordable housing programs.

He discusses the securitization of mortgages and other debt in detail. He explains that Fannie Mae and Freddie Mac “chose” to meet political pressure to increase its commitment to affordable housing by increasing their purchase of subprime mortgage securities. Fannie Mae is not a lender. It purchases mortgage loans made by private lenders, packages them into trusts, and sells securities issued by the trusts with a guarantee, based on its calculations of risk.

The New York Times explains what happened. Fannie Mae announced in 2000 that it would buy $2 trillion in loans to low-income, minority and risky borrowers by 2010. By 2004, Wall Street was cutting into the mortgage securitization business, reducing Fannie Mae’s stream of good mortgages. Investors were insisting that Fannie Mae take more risks in pursuit of profits. Lenders, like Countrywide, used their streams of mortgages as leverage to insist that Fannie Mae take on more crummy loans. Management pay and bonuses were based on volume, which encouraged risky lending at Fannie Mae just as it did at all finance companies. Congress was under Republican control throughout the period. Republicans weren’t supportive of affordable housing, and if there was Congressional pressure, it was at the behest of the banksters.

This is a relevant point, because Greenspan argues that the growth in these securities was “politically mandated, and hence driven by highly inelastic demand.” He joins with the Republicans in blaming the debacle on bad government instead of bad regulators. In fact, it is another failure of markets.

Greenspan admits that there was a housing bubble, and that participants in the market knew it. They believed they would be able to get out ahead of everyone else, so they pushed the securities rather than lose market share or vast profits. He throws up his hands, denying that there was anything he could have done.

Here is his conclusion:

Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible. Assuaging their aftermath seems the best we can hope for. Policies, both private and public, should focus on ameliorating the extent of deprivation and hardship caused by deflationary crises. But if an effective way to defuse leveraged bubbles without a major impact on economic growth is discovered, it would be a major step forward in organizing our market economies.

For Greenspan, the only alternative to laissez-faire capitalism, is “some form of central planning”. He ignores the complex range of alternatives. The obvious solution to a “leveraged bubble” is for regulators to restrict leverage. That didn’t happen. It didn’t happen in the dot com bubble, when Greenspan refused to increase margin requirements and use other techniques to restrict lending on securities, and it didn’t happen in the housing bubble. Greenspan chose to let leverage run free, knowing full well that the government would bail out the giant banks.

There is no indication that any of the President’s economic advisers disagrees with Greenspan. As long as people who think like Greenspan are in charge, we are doomed to repeat the failures of the past.



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