Is Greenspan to Blame for the Housing Crisis? And, if he is, is this entirely a bad thing?

by Greg Swann

Suburban Phoenix Real Estate Broker

Author website

The second half of a US News dyscomium on Alan Greenspan’s Fed:

The global spread of capitalism has increased inflation-dampening competition throughout the world and allowed investors to accept lower yields when investing in bonds. What’s more, globalization has boosted incomes, in Asia and beyond. That has expanded the pool of savings that can flow into U.S. debt, forcing rates lower. The result, according to a 2006 paper by economist Tao Wu at the Dallas Federal Reserve Bank, is a “substantially weakened” Fed.

Then again, Greenspan might want to embrace his role in all this. Just as the Internet bubble left behind Google, eBay, and 90 million miles of fiber optic cable, the credit bubble upgraded America’s aging housing infrastructure and created a host of online services—Realtor.com, Zillow—that have permanently shifted the balance of power from real-estate agents to consumers. As Australian economist and bubble-ologist Jason Potts puts it, “A bubble is good for growth because it creates a low-cost environment for experimentation.” Even if it eventually pops.

It’s understood that unwarranted risk results in a voluntary transfer of wealth from the badly-advised to the better-advised. In real estate, professional investors are slavering at the sidelines waiting to pick up foreclosed homes.

For my own part, I find myself wondering why only a few price categories have risen substantially during what has been the ten years since the U.S. went of the Volckerized pseudo-gold-standard. I had thought the answer was in productivity increases owing to technology, but I hadn’t considered the impact of much cheaper imported goods, especially from China.

What Paul Volcker was doing, and what Greenspan was doing until 1997 or so, was surfing the price of gold as a guide for currency inflation. If the price of gold was relatively stable, then the Fed was inflating the currency at approximately the same rate that productivity was growing. Post hoc — irrational exuberance, dot.com bomb, Enron/Tyco/etc., 9/11, housing boom — the price of gold is up substantially, which argues that the money supply has increased far ahead of productivity. Except that prices for services and manufactured goods (excluding housing) have not risen accordingly. Ignoring the housing and mortgage lending crunch, the Fed would seem to have done a pretty good job at managing inflation.

Things can change, of course — though probably not as much as you might fear. The rain-dancers of the housing crunch are ecstatic that they finally made it rain, but we live in a dynamic economy. Nothing changes as quickly or as drastically as the headline-hungry would have it. The United States has an immensely productive economy, and it may turn out that, as wrong as it seems to have been, the Fed in the end will not have been very wrong at all.

(Please note, in no way do I mean to imply that I endorse or uphold central banking. Even at its best, Volcker’s pseudo-gold-standard was robbing the interest value of passive savings, mainly from the elderly. It just wasn’t stealing the principal as well — the effect and purpose of currency inflation.)

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