I am amazed at how easily our leaders lie to cover up what is happening to our economy. It is ridiculous for Alan Greenspan to say he is ‘shocked’ by the current credit/financial crisis.  There is absolutely no doubt that the Federal Reserve setup the world system for a final, systemic failure during Greenspan’s watch.  Let’s take a look at a couple of his comments and compare them to reality.

 

“no one could have predicted the collapse of the housing boom and the financial disaster that followed” – Alan Greenspan

 

Really?  Let’s take a look at housing data and U.S. income from the 1970’s until now.

 

 

 

 

 

We can see that housing prices began to diverge from income in the mid-1990’s.  By the year 2000, it was clear to anyone paying attention that a housing bubble was forming – housing prices cannot outpace income forever – people must be able to pay their mortgages.  This was certainly known by the Federal Reserve – it’s easy to see there was a problem.  Again, it’s doesn’t take a legion of Economists to understand this.  So, you can see that it’s ridiculous for Greenspan to say that no one could have predicted the housing market collapse.  There’s only one explanation for his comments – he’s lying.  Not only did the Federal Reserve know about this housing bubble – they contributed to the magnitude of the bubble!

 

In order to sustain this bubble for a longer period than the previous two recent housing bubbles (late 70’s and mid 80’s), something different had to happen.  What happened?  If you remember, we began to see a massive amount of liquidity flowing throughout the world.  Where did this liquidity come from?  Central Banks throughout the world were creating massive amounts of money through our monetary system (once again – exponential money growth) and reducing interest rates to almost nothing.  As a result, there was massive amounts of capital available for banks to lend – at low interest rates.  This fueled all types of ‘exotic’ mortgages – subprime, interest only, no down payments, option-ARMs, etc.  Banks had money to lend and created all kinds of ways to make loans.  Wall Street began providing massive amounts of funding – contributing to the problem.  Greenspan even told us that ARMs and variable interest rate loans were good options for mortgages.  This environment allowed the housing market to continue on its unsustainable ride – a ride that would end with a massive collapse.  This was not a surprise to Greenspan, Bernanke, Paulson, Bush or anyone else at the top echelons of power in our country.  If only Hollywood had actors as good as our leaders.  This would be entertaining if it was a fictional movie and they weren’t destroying the financial stability of our nation.

 

Let’s continue with a few more comments by Greenspan.

 

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."

 

“Former Fed Chairman Alan Greenspan said he was "shocked" by the breakdown in the credit system and told Congress the crisis was once in a century.”

 

Is this a once in a century crisis?  Currencies, commodities, stocks and banks the world over are collapsing.  I don’t think the world has seen what we’re experiencing.

Lawmakers read back quotations from recent years in which Mr. Greenspan said there's "no evidence" home prices would collapse and "the worst may well be over."

More lies.  As we’ve seen – it was obvious that housing prices would collapse.  He knew very well that the worst was not over.

“Amid the barrage of questions, Mr. Greenspan dodged and weaved. He would begin meandering responses in the elaborate phraseology that once served him so well, only to be cut off as lawmakers sought to use their brief question time for sharper attacks.”

I can only imagine what it must be like to continue lying in this environment.  This is a grand show – and everyone’s watching.

“Mr. Greenspan's confidence in the resilience of home prices -- shared by most in the industry at the time -- became a critical forecasting error. The belief spurred more mortgage underwriting because lenders assumed that borrowers living on the edge could always refinance or sell their homes for a profit if they ran into trouble. Instead, with home prices now falling, hundreds of thousands of homeowners are facing foreclosure.”

I know that millions of people expected to be able to refinance before interest rates increased or balloon payments came due.  Guess who slammed the door shut before people could escape from this nightmare?  I’ve said it before - we are dealing with some very evil people here.

“In an echo of the Watergate hearings 35 years ago, Mr. Greenspan was asked when he knew there was a housing bubble and when he told the public about it. He answered that he never anticipated home prices could fall so much. "I did not forecast a significant decline because we had never had a significant decline in prices," he said.”

 

We never had a massive decline in housing prices because we’ve never experienced a housing bubble as large as this one.  Factor in the effects of our monetary system (massive debt growing exponentially) and you’ve got a perfect financial storm.  It’s hard to even listen to the lies anymore.  Will anyone ever tell us the truth?

 

 

OCTOBER 24, 2008

Greenspan Admits Errors to Hostile House Panel

By KARA SCANNELL and SUDEEP REDDY

Alan Greenspan, lauded in Congress while the economy boomed, conceded under harsh questioning from lawmakers that he had made mistakes during his long tenure as Federal Reserve chairman that may have worsened the current slump.

In a four-hour appearance before the House Oversight Committee Thursday, Mr. Greenspan encountered legislators who interrupted his answers, caustically read back his own words from years ago, and forced him to admit that, at least in some ways, his predictions and policies had been wrong.

Former Fed Chairman Alan Greenspan said he was "shocked" by the breakdown in the credit system and told Congress the crisis was once in a century. Video courtesy of Reuters. (Oct. 23)

Former Federal Reserve Chairman Alan Greenspan testifies during a House Oversight and Government Reform Committee hearing on Capitol Hill Thursday.

Returning to Capitol Hill amid a financial crisis rooted in mortgage lending, Mr. Greenspan said he had been wrong to think banks' ability to assess risk and their self-interest would protect them from excesses. But the former Fed chairman, who kept short-term interest rates at 1% for a year earlier this decade, said no one could have predicted the collapse of the housing boom and the financial disaster that followed.

Lawmakers weren't buying his explanations. "You had the authority to prevent irresponsible lending practices that led to the subprime-mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price," said Rep. Henry Waxman (D., Calif.), chairman of the House committee.

Lawmakers read back quotations from recent years in which Mr. Greenspan said there's "no evidence" home prices would collapse and "the worst may well be over."

The 82-year-old Mr. Greenspan said he made "a mistake" in his hands-off regulatory philosophy, which many now blame in part for sparking the global economic troubles. He quoted something he had written in March: "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."

He conceded that he has "found a flaw" in his ideology and said he was "distressed by that." Yet Mr. Greenspan maintained that no regulator was smart enough to foresee the "once-in-a-century credit tsunami."

The hearing made clear how far the 18-year central banker's reputation had fallen from the days when he was hailed for his stewardship in keeping inflation low, holding growth up and helping pull the world through financial crises, including the Asian crisis and other turmoil a decade ago.

Greenspan: From the Archives

When Alan Greenspan retired in 2006 after 18½ years as chairman of the Federal Reserve, his economic legacy seemed secure: Inflation and unemployment were lower than when he took office, and during his tenure, the U.S. experienced just two mild recessions and its longest expansion on record. But today, that legacy is under fire amid the housing slump and financial crisis. Here is a look back at Greenspan as covered in the Journal:

Two and a half years after Mr. Greenspan left office, Congress is drawing plans to remake global financial regulation with the kind of tight government hand that he long opposed. At the same House hearing, Securities and Exchange Commission Chairman Christopher Cox, himself a longtime free-market Republican, said he supported merging his agency with the Commodity Futures Trading Commission, creating a beefed-up supercop to police certain previously unregulated financial products.

Amid the barrage of questions, Mr. Greenspan dodged and weaved. He would begin meandering responses in the elaborate phraseology that once served him so well, only to be cut off as lawmakers sought to use their brief question time for sharper attacks.

In an echo of the Watergate hearings 35 years ago, Mr. Greenspan was asked when he knew there was a housing bubble and when he told the public about it. He answered that he never anticipated home prices could fall so much. "I did not forecast a significant decline because we had never had a significant decline in prices," he said.

Mr. Greenspan's confidence in the resilience of home prices -- shared by most in the industry at the time -- became a critical forecasting error. The belief spurred more mortgage underwriting because lenders assumed that borrowers living on the edge could always refinance or sell their homes for a profit if they ran into trouble. Instead, with home prices now falling, hundreds of thousands of homeowners are facing foreclosure. Prices nationwide have fallen nearly 20% since their 2006 peak, and many economists foresee a further decline of 10% or more in the next year.

The difficulties of forecasting served as a key defense for Mr. Greenspan. The Federal Reserve, with its legions of Ph.D. economists, has a better forecasting record than the private sector, he said, but that's still not enough to prevent every problem. "We were wrong quite a good deal of the time," he said. Forecasting "never gets to the point where it's 100% accurate."

Subprime mortgages led to a global economic crisis in considerable part because of securitization, in which the home loans were sliced up, packaged into securities and sold off to investors all around the world. Anticipating such a crisis is "more than anybody is capable of judging," Mr. Greenspan said.

If the best experts were not able to foresee the development, "I think we have to ask ourselves, 'Why is that?'" Mr. Greenspan said. "And the answer is that we're not smart enough as people. We just cannot see events that far in advance."

He continued, "There are always a lot of people raising issues, and half the time they're wrong. The question is what do you do?"

Lawmakers, stung by having to put $700 billion of taxpayer money on the line to rescue the financial system, were unmoved throughout the hearing, and eager to make their own points about the situation.

Rep. John Yarmuth, Democrat of Kentucky, hit Greenspan close to home, calling the avid baseball fan one of "three Bill Buckners." That was a reference to the Boston Red Sox first baseman whose flubbed handling of a routine grounder cost his team the 1986 World Series. Former Treasury Secretary John Snow and Mr. Cox, who sat alongside Mr. Greenspan, also got tagged with that comparison.

Lawmakers homed in on a warning the late Fed governor Edward Gramlich gave Mr. Greenspan in 2000 about potential problems in lending practices. Mr. Greenspan said he agreed but added that if the matter was of such high concern, a Federal Reserve subcommittee would have presented it to the full board. He said that never occurred.

The former Fed chief also said he was often following the "will of Congress" during his long tenure and did "what I am supposed to do, not what I'd like to do."

Mr. Greenspan has spent much of this year defending his record at the Fed, trying to take apart arguments to show how his decisions were far less significant than outside forces in causing the crisis.

The central bank is blamed for too vigorously spurring home buying through its low short-term interest-rate targets, which were initially set to fight the economic slump after the dot-com bubble burst in 2000-01. Mr. Greenspan maintains that the development of China and other factors fostered low rates -- around the globe and not just in the U.S. -- contributing to a housing boom that was world-wide.

Lawmakers took Mr. Greenspan to task for his advocacy of credit-default swaps, an unregulated kind of insurance contract that can help investors protect themselves against another party's bankruptcy. Credit-default swaps were also used as a way of taking risks and are widely blamed for adding to financial-market instability. Rep. Waxman asked pointedly, "Were you wrong?"

Mr. Greenspan said, "Partially." While he cautioned the lawmakers against excessive regulation, he said credit-default swaps "have serious problems" and, after some pointed questions, agreed they should be subject to oversight.

The treatment was a striking contrast with one of Mr. Greenspan's last appearances before Congress as Fed chairman, on Nov. 3, 2005. "You have guided monetary policy through stock-market crashes, wars, terrorist attacks and natural disasters," Rep. Jim Saxton (R., N.J.) told him then. "You have made a great contribution to the prosperity of the U.S. and the nation is in your debt."

—Brian Blackstone contributed to this article.

Write to Kara Scannell at kara.scannell@wsj.com and Sudeep Reddy at sudeep.reddy@wsj.com