December 17, 2007

Alan Greenspan: mendacious or merely senile?

Filed under: Affordable Housing,Alan Greenspan,Bailout,Fed,Financial Responsibility,Rant — labordaytheses @ 7:32 am

Excerpt (at length) via Economist’s View:Greenspan Says He Favors a Government Bailout for Homeowners, by Steve Matthews, Bloomberg: Former Federal Reserve Chairman Alan Greenspan said he favors spending U.S. government money to bail out mortgage borrowers who risk losing their homes because they can’t make payments.

Greenspan, speaking on ABC’s ”This Week” program aired today, said cash bailouts, while creating a larger budget deficit, have the advantage of helping homeowners without distorting property prices or interest-rates on mortgages.

”Cash is available and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this,” Greenspan said. ”It’s far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it’ll drag this process out indefinitely.”

Greenspan’s suggested approach differs from that of Treasury Secretary Henry Paulson, who negotiated a freeze on the interest rates of some subprime mortgages without pledging any government money to help homeowners or banks.

The WSJ Economics blog has more. Greenspan is asked next if there needs to be a bias toward activism right now:

It depends what you mean by activism. If you mean doing something that works, absolutely. If you mean doing something just for the sake of perceptions, that’s very costly. I don’t know if [infusing cash] would work, but it would certainly help people — it would help their incomes; it would help their personal state, without affecting the structure of the way markets are behaving and the way adjustment process is going on. It’s very critical that this thing reach a selling climax — if I may put it in other words, exhaust itself. It’s only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony.


Cross-posting the comment I posted there as I so rarely have time to update this blog these days


Seriously? We’re expected to take advice on how to fix the mortgage mess from one of its principal architects?

I have just 3 questions for Alan:

1) Exactly whose “cash is available” please? I have a sneaking suspicion Alan is offering to let me and the rest of the little people who pay taxes pick up the tab for his mortgage mess. I, however, am a little strapped and need to use my savings to pay my expenses which have more than doubled since 2000 (weird, I know, since inflation is so benign)

2) Can someone please explain how handing out cash to the weak hands in the market will help us get the “selling climax” correction that even AG acknowledges is necessary over with faster? I admit to not being an economist, but it sounds like a surefire recipe for *prolonging* the correction to me.

3) Where, in all of this, is the concern for prudent, hard-working families who can no longer afford homes because institutional bubble blowers have allowed property prices to get so wildly out of touch with reality?

I’ve said it before, and I will say it one more time here: this crisis is, at its root, an affordability crisis. People with good jobs and good savings can no longer afford to buy a home for their family in many parts of this country. Absent socialism, we have exactly two options for fixing this – – incomes can rise a *lot* or prices can drop a *lot.* That’s it – there are no other real solutions.

I think it’s high time the geniuses who got us into this mess step out of the way and let the free-market they ostensibly worship do what it’s designed to do — determine appropriate prices.


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