Much to my dismay, former Federal Reserve chairman Alan Greenspan remains a respected figure in financial and political circles. Today, the man once labeled the “Maestro,” offers his take on the ongoing mortgage crisis in an op-ed for the Wall Street Journal.
On Aug. 9, 2007, and the days immediately following, financial markets in much of the world seized up. Virtually overnight the seemingly insatiable desire for financial risk came to an abrupt halt as the price of risk unexpectedly surged. Interest rates on a wide range of asset classes, especially interbank lending, asset-backed commercial paper and junk bonds, rose sharply relative to riskless U.S. Treasury securities. Over the past five years, risk had become increasingly underpriced as market euphoria, fostered by an unprecedented global growth rate, gained cumulative traction.
The crisis was thus an accident waiting to happen. If it had not been triggered by the mispricing of securitized subprime mortgages, it would have been produced by eruptions in some other market. As I have noted elsewhere, history has not dealt kindly with protracted periods of low risk premiums.
The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall. Following these world-shaking events, market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World. (emphasis added)
Wait. Hold on. Is Alan Greenspan arguing, in print, that the debacle surrounding subprime loans can be blamed on the collapse of communism?
I can appreciate the fact that Greenspan is uncomfortable being blamed for the current crisis — despite, of course, his role in the current fiasco — but blaming the end of the Cold War is, well, pretty silly.
Paul Krugman has arguably been the most consistent and reliable Greenspan critic in the country over the last several years. He once aptly described the former Fed chairman as a man who “suggests leaving the barn door ajar, and then — after the horse is gone — delivers a lecture on the importance of keeping your animals properly locked up.”
In that context, Krugman was talking about Greenspan supporting Bush’s tax cuts, and then complaining about the deficits caused by the tax cuts, but it’s a description that has a variety of applications.
[I]t also applies to what he’s saying now about the subprime crisis.
All that wisdom about an “accident waiting to happen” — an accident for which he, of course, bears no responsibility.
Remember, this is the guy who brushed off Edward Gramlich when he warned about subprime problems; who “frequently argued there could be no housing bubble.”
The chutzpah is breathtaking.
In 2005, Harry Reid called Greenspan “one of the biggest political hacks we have here in Washington.” It’s a description that looks more and more accurate all the time.