Thanks a LOT, Greenspan

The former Fed chief's criticism of the rescues of Bear Stearns, Freddie and Fannie is infuriating because he created the mess that led to them.





In the shameless-self-promotion department, this is exactly why I wrote "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve."I would encourage folks who are still puzzled about how these terrible problems can coexist to pick up a copy. Not because I need the book royalties but because I think it might be helpful.

The sorry state that we find ourselves in is a function of the Fed's interest-rate-targeting policies. More specifically, it was caused by the policies of Alan Greenspan, the Fed chief from 1987 to 2006. Just as this column was being filed, he graced the front page of The Wall Street Journal with some, shall we say, interesting observations.


In an article headlined "Greenspan sees bottom in housing, criticizes bailout," he said, "Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009." (He did leave himself some wiggle room, as he also noted that "prices could continue to drift lower through 2009 and beyond.")

Of course, we shouldn't forget that this is the same man who in October 2006 opined, "I think the worst of this (housing problem) may well be over."


The problem with that line of logic: Greenspan made the Bear Stearns bailout inevitable when he set the precedent of rescuing Wall Street during the collapse of hedge fund Long-Term Capital Management in 1998.

Of course, those actions led to the massive blowoff to the stock bubble, the response to which led to the real-estate bubble. Thus, had he not bailed out Wall Street, I don't believe we would ever have been in a situation in which a Bear Stearns bailout would have been required or even considered.

In sum, it was Greenspan who set this train wreck in motion, with his specific policies regarding Long-Term Capital, dramatically altering the financial landscape by creating what's known as the "Greenspan put." Making matters worse, in the wake of that "warning shot," he advocated the deregulation of the financial system and championed securitization at every chance he got. While in charge, he never tried to put a stop to any dangerous policy but, rather, pursued it aggressively.

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/NowGreenspanDoesntLikeBailouts.aspx