“Greenspan said in an interview with Austrian magazine
Format that low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.”
He is just plain freaking lying. And for ideological reasons.
…Most prominently is the regulation of their member banks in terms of “what counts as capital that they can borrow against”. Different assets (i.e. loans to public) count differently depending on their credit quality.
While I agree with the comments previously to this point, this I believe you are seriously wrong. You have forgotten that most of the run-up in prices was after 2003, which was when the rates started heading up. You have forgotten the issue of securitization which gets the loans off the banks books. Most of these shaky mortgages were securitized. In addition, non-banks were involved with a lot of the lending, who then sold off the loans as bundles/traunches through securitization. The banks largely held the good paper(loans) but sold off the dirty paper. The only way they would get hit is if they have to buy back the paper because they misrepresented the risk of default. In addition, the fed does not control the banks origination ‘quality’.. but the FDIC can (they insure the depositors, and therefore the risks of any lending).
The reason why most of the new shaky loans were securitized was because there is a value the Fed does control, which is the bank reserve ratio(like margin ratio). It is the ratio of value on loan to deposits/assets on hand. The banks could not loan anything more out. But if they securitize the loans, they can sell of the bundles of loans as a yielding security, and get money back from the sale, get the loans off their books to keep the bank under the reserve ratio.. and get all those origination fees etc with (supposedly) little skin in the game.
The Fed also has authority over margin requirements for stocks. (Why? Lessons of 1929, of course, back when people actually seemed to learn things from experience instead of accusing others of being ideologically impure).
In the biggest bubble in modern history, did they do anything about margin requirements? Did they use the single most targeted tool they have? No.
True.. (Margin requirements in stock accounts are similar to reserve ratios on banks).
Bartenders have more sense than Alan Greenspan. You cut them off, period.
That didn’t happen until the bars became liable if the person had an accident afterwards. Hum.. sue the Fed??
And he didn’t do ANYTHING, and lied and says that the Fed was powerless.
Wrong. First one (stock bubble), he did the wrong thing. The second one, he couldn’t because Congress allowed loans to be securitized with little oversight as to how they were securitized. This provided an end run around reserve ratios (margin requirements). I think additional authority should be given to the SEC with respect to securitized loan paper. It would be real nice to have R.E. brokers and mortgage brokers have to go through the same regulations that a ‘stock broker’ has to go through… with the same repercussions. (SECs ban on a person can be for life).
If a stock broker told a client that all he had to do if he couldn’t handle the monthly was to ‘remargin’ his existing holding because the increase in value would take care of any costs.. they would lose their license… possibly for life.
Many mortgage brokers were saying just that.
If a stock broker starts giving investment advice w/o being a licensed CFP/CFA, their goes their Series 3 or 7..
But many RE brokers were giving people financial advice, or trying to drum up some fear (buy now or forever be priced out..).
Anyone want to take a stab at the reason for the 91-day yield flight from the FFR? Is there a historical precedent?
Maybe discounted for anticipated devaluation of the dollar?
I don’t think many of the foreign investors will be picking up much US paper right now. Too risky. Dollar devaluation will eat into returns. The people in the US don’t save enough to handle the current deficit spending..
So onward to peso-dollars!!! I think Bernanke will learn that the US economy is no longer an island. Hopefully before it is too late. Keep the rate high, people may pick up US paper.. keep the rate low.. and what foreign country would want to pick it up? Rate of return/yield does not offset the risk..
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