Greenspan was ?shocked, shocked? at the ?breakdown in U.S. credit markets? while not accepting any blame for his role in causing the crisis by lowering the Fed?s interest rate to one percent. His shock sounded like Captain Renault?s when he heard that there was gambling at Rick?s Caf? American in Casablanca.
CNBC reported on Greenspan?s testimony before Congress here.
At the heart of the breakdown of credit markets was the securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, Greenspan said.
OK, but what caused this?
“Without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer,” he said.
But why was there excess demand?
“The consequent surge in global demand for U.S. subprime securities by banks, hedge and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem,” he added.
Mr. Greenspan you are not answering my questions.
Former Treasury Secretary John Snow agreed that risk had been under-priced on a global basis.
Yes, Mr. Snow, but what caused risk to be under-priced?
He said risks in mortgage markets were masked in part by accounting irregularities at Fannie Mae and Freddie Mac.
Was that the only problem at Fannie and Freddie, Mr. Snow?
Of course, both Greenspan and Snow are talking about the symptons not the causes. The causes are summarized by George Leef here.
In this case, the grand vision was that homeownership is good and that government should promote it. Bill Clinton initiated it, and George Bush was glad to take credit for the increasing percentage of Americans who own their homes. During Clinton’s first term, Congress beefed up the Community Reinvestment Act to put strong pressure on banks to lend in “underserved areas.” The government-sponsored enterprises Fannie Mae and Freddie Mac gobbled up vast numbers of these new loans, bundling them for resale and earning astounding windfalls for their executives. And the Federal Reserve did its part by keeping interest rates artificially low for years, driving a housing market boom that made people giddy.
