Why are people saying that Alan Greenspan had a lot to do with our current economic predicament?
Answers
109 points
dslwong answered one year ago …
Some people have pointed their fingers at Greenspan for creating the housing bubble when he cut rates to very low levels back in 2000/2001. This caused a drop in mortgage rates which made it very cheap for people to take out mortgages to buy homes whether to live in or for real estate speculation purposes. When he later started to raise interest rates back to the 5.25% level, mortgage rates increased simultaneously. Because it was so cheap to take out a mortgage, and the cost of money was so low, this is about the time subprime mortgages increased from roughly 6% of mortgage market share to 20%. Many people were taking out mortgages which they could no way afford...thus, you have the current mortgage and housing market debacle.
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951 points
Grudun answered one year ago …
Alan Greenspan is partially at fault for the mortgage bubble. Each time there was a economic problem during his term he tried to reduce the short term pain by flooding the markets with cash. The problem is that each time he did it it inflated a bubble. In the late 90's there was the collapse of Long Term Capital which caused Greenspan to pump cash into the market much of which went into the .coms. Then the .coms crashed along with the economy after 9/11 which resulted in more cash pumped into the markets(with extremely low interest rates) which inflated the housing bubble. Now the housing/credit bubble is popping and the commodities bubble is inflating with all the cash Bernanke is pumping into the economy but this bubble is coming with inflation and some/all of the economic pain that should have been absorbed over the last decade putting the economy in a bad position.
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dslwong answered one year ago …
I don't think it is fair to say that Greenspan pumped money into the economy everytime there was a problem - he did what he had to do at the right times... the preceding bubbles that followed his actions were in many ways beyond his control. Had he not reduced rates during those times we may have suffered much more severe recessions. Obviously at the time no one complains and no one cautions the possbility of these catastrophic housing and mortgage bubbles because the econmy was doing so well! Now that there are serious problems with our economy and other markets and everyone is trying to find someone to blame.. so they point the finger at Greenspan!
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825 points
Dragonsbane answered one year ago …
I am one of the people who would point the finger at Greenspan, though Bernanke isn't much better. It is a fact that Greenspan cut rates very quickly in response to every crisis. After 9/11 he cut the Federal Funds rate to 1% and left it there even after the economy began to grow. We had one quarter of 7+% growth and 3 more quarters of 3+% growth before Greenspan started to slowly tighten again. That caused massive misinvestment and inflated a number of bubbles. You should also realize that with the Federal Funds Rate at 1%, money is better than free to banks. Real interest rates are negative, so you are being paid to spend or invest it. Even the ECB criticized the Fed's easy money policy in a long and boring paper (whose name I can't recall). I would also point out that mortgage industry regulation is the DUTY of the Federal Reserve. In fact another Federal Reserve president pointed out the explosive growth in the mortgage industry and suggested more regulation. Greenspan brushed that off, because he's a "free market" guy. According to Greenspan, the mortgage industry didn't need regulation at the time. He also advised Americans to take out ARMs instead of fixed rate mortgages when the Federal Funds rate was at a historically low 1%. I believe he said, Americans are wasting tens of thousands of dollars taking out a fixed rate mortgage when an adjustable rate mortgage would probably be a better option. The list goes on and on. I'll just stop here and recommend the book: "Trillion dollar meltdown"
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150 points
tlune answered one year ago …
I would like to add my vote for pointing a great big finger at Greenspan, and go a little bit further to say that he is primarily responsible. As the Fed chairman for 18 years, he acted as a political appointee rather than a financial steward. That is why Reagan relaced the last great Fed chairman, Paul Volcker, with Greenspan in the first place. They knew Greenspan would play ball, and he sure did! I am stunned to see anyone actually defending the man at this point. His pathetic cross-country speechmaking marathon in an attempt to defend his reputation is an embarrassment to the country. I agree wholeheartedly with Dragonsbane.
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dustbusterz answered one year ago …
I don't think its any one person in the government or the banking system.
Its a combination of everybody there, causing these problems.Every time the economy slows a bit, our government thinks the wisest thing to do is get their little printing presses warmed up, and print like no tomorrow. This just serves to make it easier for us to live beyond our means. I think we (and I mean our Government at this point) needs to leave well enough alone. When the economy slows, its a sign we have spent beyond our means as it is, and we need that break(however painful it might seem at the time) to get back to a saving mode. I believe,without the Fed getting in the way, any recession we might have , would take care of its self in short order.
Look at England, they are going to do the exact same thing our fed is doing , and they are about to experience the same pain we are going through .Governments need to just leave it alone. Actually ,bailing out the bear Sterns was a stupid idea. One investment Bank going belly up won't kill the economy, and it will show the others that we won't be padding their pockets each time they do something stupid, like the Sub Prime Loans.Once they know they cannot expect a bail out each time they act crazy, they'll think before getting into such deals in the first place.
