I spent a good part of last weekend muttering to myself about Alan Greenspan's latest message from on high, wondering if it was worth my while taking the farschimmelt octagenarian to task for stating the obvious while dodging any responsibility for the looming housing crisis. As it turns out, I needn't have worried; the good Professor Krugman did all the heavy lifting:
Regular readers know that I have never forgiven the Federal Reserve chairman for his role in creating today's budget deficit. In 2001 Mr. Greenspan, a stern fiscal taskmaster during the Clinton years, gave decisive support to the Bush administration's irresponsible tax cuts, urging Congress to reduce the federal government's revenue so that it wouldn't pay off its debt too quickly.At the time, Greenspan's rigor during the Clinton years made him look like the Fed's version of Albus Dumbledore--strict, but with everyone's best interests in mind. His wildly irresponsible, blase attitude toward BushCo's rape-and-pillage approach to managing the economy has exposed him as the partisan hack that he is. You can take him home now, Ms. Mitchell, and don't let the door hit his ass on the way out.
Since then, federal debt has soared. But as far as I can tell, Mr. Greenspan has never admitted that he gave Congress bad advice. He has, however, gone back to lecturing us about the evils of deficits.
Now, it seems, he's playing a similar game with regard to the housing bubble.
At the conference, Mr. Greenspan didn't say in plain English that house prices are way out of line. But he never says things in plain English.
What he did say, after emphasizing the recent economic importance of rising house prices, was that "this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent." And he warned that "history has not dealt kindly with the aftermath of protracted periods of low-risk premiums." I believe that translates as "Beware the bursting bubble."
But as recently as last October Mr. Greenspan dismissed talk of a housing bubble: "While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely."
Wait, it gets worse. These days Mr. Greenspan expresses concern about the financial risks created by "the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages." But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."
If Mr. Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan's successor to manage the bubble's aftermath.