 Who, Me? Yes, You!
Peter Schiff
May 16, 2009
When, during the invasion of
Iraq, the United States Government issued its famous deck of
playing cards with the 52 arch villains of the Iraqi police state,
Saddam Hussein's face adorned the Ace of Spades. If the Obama
Administration wanted to engage in a similar public relations
campaign for the real estate crisis, the top card should be reserved
for Alan Greenspan.
Yet in a speech last Tuesday
before the National Association of Realtors, 'Sir' Alan "the-bubble-blower"
claimed that his low interest rate policies in the early and
middle years of this decade had no effect on mortgage rates or
real estate prices. As a result, he claims no responsibility
for the subprime mortgage crisis. But even current Treasury Secretary
Timothy Geithner, who shared interest rate policy responsibility
as governor of the New York Fed during the Greenspan regime,
recently admitted that overly accommodative policy helped inflate
the bubble. So what does Greenspan know that everyone else doesn't?
His primary defense is that
mortgage rates were a function of long-term interest rates which
were simply not responding to the movement in short term rates,
which he did control. While it is true that the flow of capital
from foreign creditors with excess dollars did keep long rates
low despite rising short rates, this "conundrum" was
not the leading factor in the housing bubble. Although rates
on thirty-year fixed rate mortgages are based on long-term bonds,
by 2005 such loans had become an endangered species. The housing
bubble was all about adjustable-rate mortgages with 1-7 year
teaser rates primarily based on the Fed funds rate.
The rock bottom teaser rates,
permitted by the 1% Fed funds rate, were the primary reason that
many home buyers were able to qualify for mortgages they couldn't
otherwise afford, and in turn, to bid up home prices to bubble
levels. By pushing down the cost of short-term money, the Fed
enabled homebuyers to make big bets on rising real estate prices.
Without the Fed's help, few borrowers would have "qualified"
for these risky mortgages and real estate prices never would
have been bid up so high.
Greenspan expresses exasperation
now, as he did then, that his careful nudging of interest rates
higher by quarter point increments did not translate into corresponding
increases in long-term rates. Unfortunately, according to Greenspan,
the markets would not cooperate with his wise guidance, and to
his dismay, mortgage rates fell despite his best efforts. As
they say in Texas, this dog will just not hunt. If the "measured
pace" of his quarter point hikes were too slow to produce
the desired effect, why didn't Greenspan jack up the pressure?
With interest rates far below the official inflation rate for
many years during the bubble, he certainly had plenty of room
to maneuver. The claim that he was unhappy with the results
of his rate hikes, despite his having done nothing to adjust
that policy, is ridiculous.
In addition to his colossal
errors on interest rate policy there were many other ways Greenspan
blew air into the real estate bubble. One example was what the
market called the "Greenspan put." By creating the
perception in word and deed (since proven accurate) that the
Fed would backstop any major market or economic declines, lenders
became more comfortable making risky loans. In an often quoted
2004 speech, Greenspan went so far as to actively encourage the
use of adjustable-rate mortgages and praised home equity extractions
for their role in contributing to economic growth. In fact, rather
than criticizing homeowners for treating their houses like ATM
machines, he often praised the innovative ways in which such
homeowners were "managing" their personal balance sheets.
Greenspan was as much a proponent of leverage for homeowners
on Main Street as he was for bankers on Wall Street.
The bottom line is that Greenspan
fathered the housing bubble and now he refuses to acknowledge
kinship of his wayward child. His denial of responsibility is
an act of stunning bravado, and is a testament to his ability
to turn even the simplest of situations into an impenetrable
tangle of theories and statistics. The private sector jokers
who now hold top dishonors in our pack of economic villains are
easily trumped by the Maestro. The fact that Greenspan
still has any credibility shows just how little understanding
the general public, including Wall Street and the media, actually
have about this crisis.
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May 15, 2009
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
Archives
 Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
321gold Ltd
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