The Tragic Fall of Alan Greenspan

The current demonization of Alan Greenspan makes for such a pathetic scene. Talking heads are saying things like this: Greenspan caused the "con"/housing bubble by irresponsibly lowering interest rates. He was bad at being Fed, and now we're all paying for it.

The problem with this narrative is that it forgets one troubling reality: Greenspan was pressured to lower interest rates artificially by the Clinton administration. Why? Well, for some very good reasons. Everything was going gangbusters in America in the early 1990s, but black people were still way behind in homeownership numbers (and in earnings numbers). Black people couldn't get a loan. So Clinton wanted more black people to be able to afford homes. So what did he do? He made Greenspan loosen interest rates so there would be more money so that more people (namely "risky" people--low income people) could get loans.

The only problem with all of this, of course, is that nobly extending loans to riskier groups of people in the interest of "human rights" doesn't make those loans less risky. The result, which started showing up by the late 1990s, was that the people who were given loans they couldn't afford started (surprise!) defaulting on their loans. Another textbook case of the way that social engineering, while high in sentiment, often backfires and leads to "solutions" that are worse than the original problem. This has nothing to do with race. It's simple math: if someone makes only $45,000/yr., don't give them a loan to buy a $350,000 house--they won't be able to afford it.

I say the scene with Greenspan is "pathetic" because we all know the story. Greenspan used to hang out with Ayn Rand. He's a heartless capitalist. He must've heard that narrative his whole adult life. And then one day in the early 1990s, he tired of hearing everyone call him a sunovabitch... and he lowered interest rates in a way that made policy go haywire. He must've known it would happen, but he did it anyway, tired of being called a racist, heartless, ass. Tired of hearing how defenders of market economics don't care about people. Who can really blame him?--everyone wants to be accepted. The pathos rises to Sophoclean levels now, where we find a tired-looking Greenspan a decade later, unable to explain to a forgetful public that he had nothing but humanist motivations. He did what was considered the humane thing. He wanted to be thought of as kind.


Jon Sealy said...

I don't know, Casey. I like that you're going against the easy road, which is to absolutely lampoon Greenspan, and I've heard Gary Becker, a staunch Republican, claim that the point of economics is to alleviate poverty, but I think Greenspan's tragedy is not that he fell while trying to be humane, but that he really was unable to understand irrational behavior. Check this article out:


In it, a guy confesses to Greenspan that he's underwater in his mortgage, and Greenspan stares at him in disbelief before saying, "Why would you do that?" There are some echoes of Greek tragedy (Oedipus blinded from the truth), but the more I'm reading about this collapse, the more convinced I am that this kind of bubble mentality - if that's the best phrase for it - is doomed to happen every 30 years or so because we're greedy and forgetful.

That said, it might be unfair to completely demonize the conservative platform, because the conservative platform just provides us a way to exercise our greed for profit, and it's not so much Greenspan as home speculators playing hot potato or banks offering houses for no money down and no income checks.

Casey said...

I could go there with you, Jon, if it weren't for the pressure put on the banks to make these "irrational" loans. What Greenspan doesn't understand is the way that government intervention has made "rational" behavior impossible. And that's my most precise phrase for it. The guy who got underwater on his mortgage probably wouldn't have gotten the kind of loan that he managed to get if it weren't for the corrupt relationship between the government, which wants to engineer society in a certain way, and banks.

And I can speak very personally about this kind of problem: I am considering buying a house in the relatively-near future. I know that as of now, if I purchase before the end of this month, I get an $8,000 bonus check. But I also know that as of last October, the government was saying that I had until last Nov. 30th to pull the trigger on a house, to get my bonus check. Then they extended the bonus-check period. So now I'm trying to anticipate whether they'll do it again or not.

So now, the only behavior available to me is "irrational."

Or at least that's how I'm thinking. And of course this leaves aside the long and inevitable conversation about the subtle (and sometimes vast) differences between "conservatism" and a real market economy, which hasn't existed at least since the Fed was made a part of our economic system.

BTW, what do you think: will the gov't extend my "buy now bonus check" period through December of this year? It would really be awesome if they did.

Jon Sealy said...

I'm afraid to speculate whether they'll extend that tax credit, but I think extending the tax credit might be a good idea. Home sales are still rocky, and some economists are talking about home prices taking another big dip when this credit goes away, like we've just propped up prices temporarily. So if it does go away, you might be able to make up for it by finding a house in August that's $8,000 cheaper than what you'd pay today. Of course, perhaps we'd just be extending that dip until the end of the year, so who knows what's best.

I'm with you on government fueling irrational behavior, though I wouldn't limit it to just government. If you look at the 1920s, we had a fairly unregulated economy, where a few guys with knowledge and money were able to pump the price of stocks up and get out, leaving (irrational) speculators with overpriced stocks. Likewise, was it rational for people to buy into Bernie Madoff's system? It sounds like his returns were always a little too good to be true, and it sounds like his method was "don't ask, don't tell, just give me your money and I'll give you great returns." Is it rational for someone to buy into that? But people did it, even though Madoff's system was diametrically opposed to government regulation.

I just read Burton Malkiel's RANDOM WALK DOWN WALL STREET, and he makes a good distinction between two mutually exclusive ideas about stock prices: (1) that there is a "real" price, and you buy when they're underpriced and sell when they're overpriced, or (2) there is no real price, just whatever potential buyers are willing to pay (Malkiel calls that the "there's always another sucker" theory). The first theory is rational. The market will set a price, and there is reason behind it. The second theory takes human nature into account.

I guess my messy conception of human nature is that although we are driven by incentives (be they logical or not), we often don't act rationally. I think about this every time someone waits until their groceries are bagged before they pull out their checkbook, or every time someone drives slow in the left lane or passes on the right when the left lane is wide open.

Casey said...

[My theory of the depression is, not surprisingly, sort of dogmatically libertarian; the way I understand it--even as I understand that *everybody* has a theory here--is that the creation of the Fed separated money from a physical standard, and it was this loosening of credit (must the same as Clinton's efforts) that inflated the bubble and encouraged overconfident investing.]

I'm 50/50 now. I mean, I certainly can't argue with the annoyingness of the slow driver in the left lane. But--and here I really only offer this on the outside chance that you're sort of "digging" for bottom, because this is a little dry--if I were to make one last point here, in defense of markets, I would pull from my go-to guy, L.V. Mises. But like I said, no harm if you skip this. And I mean it. Seriously!.

But here's a link--if you're interested, I'm interested in what you think of this reasonably short chapter-section: