The blood on Greenspan's hands

By Bill Fleckenstein

A debate is beginning to rage about where to lay blame for the mortgage mess: the lenders or the borrowers. In some cases, I'd point to the lenders; in others, the borrowers; and beyond that, a combination of both.

But I think that where absolutely ridiculous mortgages were issued to folks who didn't make much money and could be considered somewhat naive, the blame ought to fall more on the lenders. Of course, the lenders didn't worry about their own exposure to risk, as they passed these mortgages on to financial companies. The latter sliced and diced them into derivatives -- products that, in turn, got peddled to the next bag holder.

Claiming innocence abroad

That brings me to the champion-in-chief of derivatives and the man responsible for the lion's share of this debacle: Alan Greenspan. (He has been on my mind the past couple of months, as I have been writing a book about him, slated to be published around the turn of the year.) And yet, in a recent speech in Oslo, Norway, he disavowed all responsibility in a stunning display of arrogance.

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Said the former Federal Reserve chairman: "Markets are becoming aware of the fact that the decline in housing is not stopping. . . . I have no particular regrets. The housing bubble is not a reflection of what we did, as it is a global phenomenon."

Greenspan's conclusion is not accurate. But before describing why, I find it interesting that he said the words "housing bubble." Recall that as the housing bubble was raging and he was still Fed chairman, he argued that real estate could not experience a bubble because all housing markets were local. He specifically cited the impossibility of arbitrage between Portland, Maine, and Portland, Ore., as though that was an impediment to a bubble.

Now he's making the argument that not only is there a housing bubble but that it's been a worldwide housing bubble. Well, this is a rare occasion where he is right. It is a worldwide housing bubble. But that does not mean he was a hapless bystander as the bubble developed. Just the opposite is the case.

One reason for the global housing bubble is that the dollar has been the world's reserve currency, with parts of South America, the Middle East and the Far East linking their currencies to ours. As such, the weak dollar has been a conduit for spreading easy money globally. Therefore, although Greenspan did not directly cause the housing bubble in Europe, his pursuit of wildly indulgent monetary policies at home were transmitted abroad. That did not exactly hurt the development of a housing bubble there.

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In short, it just doesn't work for Greenspan to cite the global dimension of the housing bubble as "proof" that he didn't do anything wrong here in America. It's illogical and inaccurate.

Alan the Omniscient

For those folks not keeping track of Greenspan's housing-bubble comments:

On Oct. 9, 2006, at a financial conference in Calgary, Alberta, he said: "I suspect that we're coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out. . . . There is a good chance of coming out of this in good shape, but average housing prices are likely to be down this year (meaning 2006) relative to 2005. I don't know, but I think the worst of this may well be over."

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That will come as news to one individual at the receiving end of Greenspan's reckless monetary policies. Her plight -- one of many we'll be reading about for the rest of this year and much of next -- was described in last week's Wall Street Journal: In 2005, this single mother of three, who makes about $34,000 a year, took out a first and second mortgage totaling $385,000 with no down payment. She is behind on both mortgage payments and will likely lose her house. Many people facing that outcome would probably have been better off renting, so maybe some small bit of this lesson learned will be a blessing in disguise, though going through it will be traumatic.

Typhoon-fed

Obviously, the worst of the housing crisis was not over in 2006 -- it hadn't even started. Once again, Greenspan extrapolated from a smattering of microeconomic data to a reach an incorrect macroeconomic conclusion. All I can say is, after having reviewed much of the data in detail, it's quite clear that a powerful storm is bearing down on us.