Tuesday, December 18, 2007

We're Paying for Greenspan's Goof

There are people who bow their heads in reverence upon hearing the name of former Fed Chairman Alan Greenspan. I'm not one of them.
For my money--and it's actually all our money--I'll take the current Federal Reserve Chairman Ben Bernanke, who's stuck mopping up the economic mess his predecessor left by allowing the mortgage lending industry to run amok and make billions of dollars in sub-par loans. Today, Bernanke unveils some tougher lending rules.
This is something Greenspan should have done years ago but didn't. Instead, his free-marketeer approach, coupled with the Fed's constant lowering of key interest rates, lit the fuse for an explosion of bad loans, consumer defaults and probable recession.
And it's not like Greenspan didn't know what was going on during those heady mortgage-making days.
As the New York Times reports today, Greenspan was flagged on the mortgage lending abuses, starting in 2000, but it didn't appear to impress him. Had he acted as a regulator, as well as a the globe's super-economist, Greenspan could have brought the lending abuses to a screeching halt and saved everyone much pain and money.
By doing nothing, Greenspan sent a strong signal that the mortgage industry's aggressive lending policies were sanctioned by the banking regulators, including making home loans to those with terrible credit scores, no down payments, and no consistent income stream.
Even when Greenspan grudgingly conceded the emergence of a housing bubble, brought on by those questionable lending tactics, the Fed stayed on the sidelines. In the Times article, Greenspan defends his inaction by dragging out one of the oldest of bureaucratic chestnuts--the Fed didn't have the resources to police the industry.
C'mon Alan, you can do better than that.
During his Fed reign, Greenspan was the most listened to person on the planet when it came to the economy. Remember the "Greenspan Effect"? A passing remark from the Fed chairman could send the markets scurrying.
If Greenspan had wanted to put a sizable dent into those despicable mortgage lending practices he just needed to use his bully pulpit, not a small army of bank examiners.
Instead, Greenspan was determined to preserve economic growth on his watch, no matter what the ultimate cost. Buying into President Bush's quest to build an "ownership society", he saw the unprecedented housing boom as a way to hedge against the stock market's decline of the late 1990s and early 2000s, according to the Times story.
Even now, Greenspan is coming up with half measures to solve this problem. With millions of mortgages under water, Greenspan's best answer is provide stressed home owners with a tax credit. While not quite an anchor, a tax credit isn't a life preserver either.
We have to do better.
Right now, Bernanke is trying to salvage the situation. Recently, he took some heat when the Fed opted to cut a key interest rate by 25 basis points, instead of the much-expected 50 points. Market mavens went bats, claiming the cut was less than expected and would derail an anticipated year end stock rally.
Oh yeah? Well, that's too bad. The stock market always craves fast relief.
But Bernanke has the ungrateful task of saving the housing industry, stopping the economy from tipping into recession and keeping inflation at bay. Right now, it's prudent for the Fed to hold the line on interest rate cuts, while the banks and investment portfolios that are larded down with crummy mortgage loans, sort out their credit problems.
Let's restore more discipline to the lending system and then see if a rate cut is needed. If so, Bernanke will act.
It may also help to remember that Bernanke didn't cause these problems. That honor belongs to Chairman Greenspan.


(Illustration courtesy of Nose Cone on Flickr)