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Move Over, Dean, and Make Way for A More Plausible Suspect in the Housing Bubble


Dear Dean,

While we journalists are often suspected of causing the housing bubble and bust, I just don’t see how a bunch of scribblers and talkers could have such influence. (I’m talking, of course, about your blog entry below, “I confess. I caused the housing downturn.”)

A more plausible suspect in this whodunnit is the Wrinkled One. Yes, that riddle wrapped in an enigma … the man you used to cover in Washington … Alan Greenspan.

Remember that the Federal Reserve, under Alan Greenspan’s chairmanship, lowered the federal funds rate to a half-century low of 1% in 2003 and 2004 to ward off the threat of deflation: falling prices, falling incomes, defaults, etc.

Lowering the funds rate to 1% was like opening a fire hydrant—money came gushing out. A huge amount of it gushed straight into the housing market, since stocks weren’t looking so good. Home lenders gave money to anyone who could move the needle on an EKG because they had so much to give.

Too much money is not a good thing. Armed with generous mortgage commitments, homebuyers fought over properties in bidding wars that sent prices to the stratosphere. They took on lots of debt and overpaid.

When Greenspan & Co. eventually realized that rates were too low, they started raising them. The housing market eventually succumbed to the higher cost of borrowing and the sheer unaffordability of homes.

This story hangs together pretty well. It also makes a great alibi for other suspects--not only journalists, but, say, homebuilders. Yesterday, I heard a version of the Greenspan-is-to-blame story from David Seiders, chief economist of the National Association of Home Builders.

Seiders says that the Fed was overly fearful of deflation around 2003 because it misread the inflation statistics. Not to get too technical, but housing is a big component of the inflation gauge, and housing costs are measured through local rents, not housing prices, as you might expect. Rents were low then because everyone wanted to buy a house.

In other words, the appetite for housing suppressed measured inflation, which raised fears of deflation, which caused the Fed to lower interest rates, which furthered whetted the appetite for housing. You can see where this spiral brought us.

Here's what Seiders said: "We were nowhere near threatening deflation. ... Greenspan will never concede this point but the Fed did inadvertently fuel the boom."

The builders are hardly blameless. They misjudged demand and overbuilt. Plus, their lending arms gave out some of the most reckless loans, which fueled the price spiral and left people in dire straits.

But Seiders does have a point about Greenspan's culpability, I think.

Dean, it's big of you to shoulder all the blame for the housing boom and bust (even if tongue in cheek), but slide over a little. We need to make room in the dock for the Wrinkled One.

Yours,

Peter


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