Alan Greenspan will not go down without a fight. Just the fact that the Wall Street Journal felt compelled to run a Page One story with the headline "His Legacy Tarnished, Greenspan Goes on Defensive," is telling enough as to the dire straits his reputation is in. But no worries, the Journal's story and associated interview excerpts give the Maestro ample room to present his side, without comment or pushback from critics.
The basic outline of Greenspan's defensive fortifications looks like this: He doesn't regret anything he did in his 18-year tenure as Fed chairman, nothing he could have done would have prevented the housing bubble, and nothing that regulators can do is likely to be more effective than self-policing by financial institutions motivated by pure self-interest.
Not much new to chew on there -- suffice to say, the events of the last year have poked some holes in the sturdiness of that bulwark.
But the Wall Street Journal did allow Greenspan to add some filigree to the tussle over his legacy that may be new to followers of this narrative. Let us revisit, for example, his oft-cited recommendation in a 2004 speech that adjustable-rate mortgages were the prudent choice for "many" Americans, and his apparent embrace of "mortgage product alternatives." I've cited that speech at some length here before, so I'll just quote the two most relevant sentences:
Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward ... American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.
The Journal reports that Greenspan is "particularly perturbed by attacks" over that speech, and he finds it "profoundly disturbing" how much attention is given to it, without any corresponding mention of a "retraction" he says he made eight days later, during a question and answer session with financier Henry Kaufman after a speech to the Economic Club of New York.
Mr. Chairman. I want to get back to a view you expressed a week or so ago concerning adjustable rate mortgage financing. Assume for a moment at the extreme that most of us would move to adjustable rate mortgage financing. Wouldn't that really increase the volatility of mortgage financing, and the volatility of housing prices? And wouldn't that complicate the task of monetary policy?
Indeed it would, Henry, and I probably spoke imprecisely at a speech that I gave before the credit unions. I did not mean to disparage the 30-year self-amortizing mortgage. I thought I was focusing on a narrow segment of prospective households who didn't like either adjustable rate mortgages currently in place or the 30-year fixed and that they might like something slightly different which would be a variable maturity mortgage. I thought I was talking about a very small segment of households.
Greenspan now says that it is "really quite unfair" that his critics never mention the "retraction" when they lambaste him for his support of the "mortgage product alternatives" that got so many home buyers into trouble. How the World Works pleads guilty: I was unaware of the retraction. I will note, in defense, that the Q-and-A with Kaufman is not included with the Federal Reserve's own archive of his speech that day to the Economic Club, and googling on the phrase "I did not mean to disparage the 30-year self-amortizing mortgage," only turns up one result from 2004, wherein his so-called retraction is characterized as "he backtracked a bit." (If readers can spot other online references to Greenspan's turnabout, I will appreciate it.)
But is it really a "retraction" to say that he did not mean to "disparage" fixed mortgages after making a pretty clear endorsement of non-traditional mortgages? And how did "many homeowners" become "a very small segment of households?"
Greenspan's ex post facto sense of perturbation stains credibility -- but no more so than his adamant declaration that nothing could have been done to stop the housing bubble or keep mortgage lenders from offering all those exotic option-ARMs and no-money-down subprime loan products to the public. Because, after all, "there are no realistic alternatives" to the necessity of depending on markets to police themselves -- or for parties in a transaction to effectively judge each other's credit-worthiness.
WSJ: You've always maintained that counter-party surveillance is superior to government regulation. Yet investors appear to have exercised little due diligence of the complex mortgage-backed securities they bought, resulting in dramatically higher defaults than anticipated. Does that change your view?
Mr. Greenspan: There were far more failures here than I expected. I've been chagrined at how badly some of the judgments of very sophisticated investors have been with respect to risks, because my fundamental view is that counter-party surveillance is critical for global finance. There are no realistic alternatives. [Counter-party surveillance broke down] largely because of human euphoria: If you have a lot of bids under anything, one perceives a liquid market. The argument, therefore, is not to discard counter-party surveillance, but, essentially, to patch it back together and improve it.
Greenspan is chagrined. The rest of us are infuriated.
His final words?
The choice is between a lightly or tightly regulated economy. The former is highly competitive, innovative, and dynamic -- but periodically visited by wrenching crises. The latter is more stable, but slower growing.
How wrenching does the crisis have to get, before stability never looked so good?