Greenspan in Bubble Denial

Original Link: http://www.minyanville.com/articles/Greenspan-fre-fnm-housing-bailout-real/index/a/18533/from/yahoo

By William Fleckenstein

In a Wall Street Journal article headlined "Greenspan Sees Bottom in Housing, Criticizes Bailout" former Federal Reserve chairman Alan Greenspan said: "Home prices in the US are likely to start to stabilize or touch bottom sometime in the first half of 2009."

He did leave himself some wiggle room, as he also noted: "Prices could continue to drift lower through 2009 and beyond."

Of course, we shouldn't forget that this is the same man who in October of 2006 opined: "I think the worst of this [housing problem] may well be over."

As I noted in my book and often in this column, while Greenspan was in office, he went to great lengths to suggest that housing couldn't experience a bubble. And, as the Journal pointed out, he also tried to make the case in 2004 -- when many of us were already certain that a disastrous bubble was in full bloom -- that "a national severe price distortion seems most unlikely in the United States, given its size and diversity."

Which just illustrates my strongly held (and I believe well-documented) view that when it comes to matters of economics, he is utterly clueless -- and completely unable to learn from his mistakes.

However, what really sent my blood boiling was his criticism of the government bailouts of Fannie Mae (FNM) and Freddie Mac (FRE). Now, you might wonder why I'd be angry that he said something that I agree with, especially: "They should have wiped out the shareholders." (He was referring to the Bear Stearns/Fannie/Freddie bailout.)

The reason I'm so angry is because of his logic -- which the Journal paraphrased as follows: "The Fed-financed takeover of investment bank Bear Stearns also made government backing of Fannie and Freddie debt 'inevitable.'" (His adjective, my emphasis.)

Then Greenspan went on to tell the Journal: "There's no credible argument for bailing out Bear Stearns and not the GSEs."

Y'all Have to Reap What I Didn't Sow

The problem with that line of logic: He made the Bear Stearns bailout "inevitable" -- when he set the precedent of rescuing Wall Street during the collapse of Long-Term Capital Management in 1998. Of course, those actions led to the massive blow-off to the stock bubble, the response to which led to the real-estate bubble. Thus, had he not bailed out Wall Street, I don't believe we would ever have been in the situation where a Bear Stearns bailout would have been required, or even considered.

In sum, it was Greenspan who set this train wreck in motion, with his specific policies regarding Long-Term Capital, dramatically altering the financial landscape, via the "Greenspan put." Making matters worse, in the wake of that "warning shot" he advocated the deregulation of the financial system and championed securitization at every chance he got. While in charge, he never tried to put a stop to any dangerous policy, but rather pursued it aggressively.