Why did Greenspan recommend ARMs in 2004?

[powayseller]

Was he trying to find a home for all that excess liquidity being printed by the Central Bank of Japan, and the Federal Reserve?

When I get to Chapter 4 in the nail-biting new book, Sell Now by John Talbott, I’ll read Mr. Talbott’s ideas. What are yours?

By the way, when I went to Fashion Valley to purchase the book and a few other goodies, the mall was as packed as ever! I didn’t see any indication of a slowdown in consumer spending.

[barnaby33]

Im going to go out on a limb here, but AG probably isn’t reading this site. I know brand me as a heretic but please don’t hold your breath for him to answer, allow me to do so as his proxy.

I, AG, am a banker. As such I do and say things which are good for banks. Many people feel that what is good for the banks is good for America as a whole and while in a macro sense that may be so, I cannot garuantee that on an individual level it pans out that way.

As to why I recommended that Americans might benefit from ARM mortgages let me say with a mimimum of obfuscation that from my point of view they are less risky. From my perspective when my or any other bank lends out money it is gambling that the opportunity cost of doing so is not so high as to make the loan a bad investment. With ARM loans that is less possible because the interest rate tends to adjust to keep pace with current lending rates.

What I would like to tell borrowers is that those fixed rate mortgages really represent insurance, a very expensive form of insurance against rising rates. If I’m wrong, well my house is paid for.

I like to sweep over the minor details, such as financing long term obligations with short term financing tends to transfer risk from the lender to the borrower. After all I am a banker and I do and say what is good for banks.

Josh impersonating AG

[North County Jim]

Barnaby,

You nailed it. I remember watching AG on CNBC during one of his visits to Capitol Hill. During Q&A (not sure if Senate or House), he mentioned that lenders (banks) bore all of the interest rate risk with the large number of fixed rate loans. He thought it would be a good idea for that risk to be spread out more and talked about ARMs as the mechanism for making it occur.

I wish I had specifics on his testimony. I perused the Fed’s web site and they didn’t include the Q&A portion as part of the online archive.

When I heard this, I knew rates were going up and he wanted the banks to spread the pain.

Does anyone else have a recollection of this and some specifics?

[powayseller]

That’s also the answer given in the book. AG was helping the banks by moving interest rate from the bank to the consumer. However, he miscalculated, because in the end, the banks are worse off, due to the upcoming foreclosures.

[Author]

Posts