Thursday, March 27, 2008

Putting Greenspan on the financial crisis team is like appointing Osama Bin Laden to 911 Commission*

This has got to be the worst idea Hillary Clinton's come up with:

She'd spoken on financial issues earlier in the day on the Penn campus, and she was pressed about one of her more controversial ideas: Naming Alan Greenspan, the former Federal Reserve chairman, to what she called "a high-level emergency group" to deal with the problem of high risk mortgages
But she was especially prodded on the choice of Greenspan. As some critics have pointed out, the former Fed chair was inactive as the housing bubble grew, and in fact seemed to encourage some of the bad practices that blew up in Wall Street's face. As noted here:
He said a Fed study suggested many homeowners could have saved tens of thousands of dollars in the last decade if they had ARMs. Those savings would not have been realized, however, had interest rates shot up.

"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," Greenspan said.

So the Daily News asked, why Greenspan, that wasn't he off-base on the housing bubble, and here was her response:

"Not only that, but the Fed didn't act while he was there. But he has a calming influence still to this day on Wall Street -- don't ask me why because I never understand what he's saying -- but nevertheless people respond to that Delphic oracle approach. I think it would be wise to include him. And recently he's come out and vert smartly so that we have to deal with housing and maybe we need to have some kind of buyout mechanism for mortgages. So he's moved on his understanding and depth of the problem -- but you know you could pick three others. You just have to have some demonstrable involvement of presidential leadership...

So now we have John McCain saying he doesn't know much about the economy, and Hillary Clinton liking Greenspan even though she has no idea what he's saying -- God help the United States of America.

And Clinton tries this just as the mainstream media is finally reevaluating Greenspan's bloated reputation, years after it became obvious, with "Perhaps the Maestro composed some discordant notes after all." This Washington Post article finds the same February 2004 quote, but they need to keep working on the journalism thing. The article gives Greenspan the chance to claim he took back the "Yeah ARMs!" quote in March 2004. But that's not quite the whole story.

In an interview last year, Greenspan said he continued to support ARMs in March 2004, but for people buying homes for two to three years. This is different from saying he reverted to supporting fixed mortgages. More importantly, the only way that short-term purchases could make sense, given a double set of closing costs in a three year period, is if prices are continually going up. Greenspan's endorsement was an endorsement of a housing bubble.

Finally, in the Post article, Greenspan says "protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support." Political manipulation wasn't his job, and shouldn't have been his job.

Adding, just one more thing - while Bernanke is far better than Greenspan, he was on the Federal Reserve Board before becoming chair, and was also Bush's former Chairman of the Council of Economic Advisors. Bernanke would make a list of the Top 100 People Most Responsible for our current crisis. Let's hope he does a better job of getting us out of it.

*Turns out that Dean Baker has a similar view of Clinton's idea.

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