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

Posted by: Peter Coy on August 2, 2007

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.greenspan1.jpg

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.David Seiders.jpg

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.



Reader Comments

David Porter

August 2, 2007 2:41 PM

Well said Peter! I suppose I should put the "Wrinkled One" on my Christmas card list. After all he played a large part in my early retirement. Many thousands of mortgage loans were written on that long downward spiral. I have many happy clients who obtained 15 year fixed rate loans in the 4.5% range.

I am so thankful that I did not participate in the sub-prime mess. I sleep very well at night with little dancing Greenspan's dancing in my head!

I love your blog! Keep up the good work guys and gal!

Stephen Borts

August 2, 2007 5:08 PM

When does the finger pointing end? Let's get to the REAL culprit for this current real estate situation . . US Corporations that get too greedy for the bottom line (yes, I'm an accounant). I'm not against free enterprise, but this is where it always gets to . . business ethics and common sense. There will always be the need for economic stimulus or tightening based on what's happening in the U.S.A. and around the world, and as a result there will always be some segment of the economy that benefits and some that don't (jezzzz . . what's new?!) Get a life . . that's the way it works. Now lets see, what is the REAL problem RIGHT NOW with real estate . . it's INVENTORY. Back to supply and demand . . always the basics . . and just as in the mid to late 1980s saving & loan crisis (who just kept on putting money out the door for real estate beyond reason - I know because I did alot of consulting in that industry back then) now the ol home builders are now just still feeding the pipeline! Until they REALLY slow down their overbuilding, there is going to be downward pressure on all residential real estate . . dah! To be sure, if Greenspan had NOT lowered rates early on, we'd all be screaming now, complaining how/why the economy is still in the tank! Come on people . . think . . it always gets back to basic economics.


August 2, 2007 5:53 PM

You know what they say, when the ship sinks, the rats start to jump off.

Good point in mentioning his majesty, the Gray Imminence. But again, it takes two to tango, and in this case, many to tango. Everyone has a responsibility, from land developers to the Fed, from Realtors to lenders, journalists to bloggers.

Maybe instead of finger pointing and blaming we could focus on educating people on avoiding this next time and finding solutions for the now? Ah, wishful thinking. Let's stick to what sales right now.


August 4, 2007 2:07 PM

It is quite interesting to note, how much I am reading about a weak greenspan now.

This is definitely setting the stage for Bernanke to keep things tight.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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