Speak Ill of the Dead—Early and Often, Please.

Alan Greenspan's monstrous legacy: an "Infernal Triangle" preview

Mr. Greenspan, he dead. Herewith, some things what I write about him in my next book, The Infernal Triangle: How America Got This Way.

Start with the end Bill Clinton’s first term, after, first, Orange County, California went bankrupt, then a giant hedge fund called Long-Term Capital Management that had been leveraged at a ratio of 250-to-one, almost went bankrupt—until a consortium of fourteen banks spent $3.6 billion to prop it up, lest a contagion of failures follow among the institutions that loaned them the money to achieve that leverage in the first place. The reason for these catastrophes was bad bets on derivatives, a type of investment future that was, intentionally, unregulated. In 1996, the federal official responsible for regulating investment futures, Brooksley Born, proposed to begin the processs of regulating them; and the Federal Reserve Chairman went apeshit.

“Economics,” he thundered at one meeting, “should inform these decisions”—not politics; and that Born was “trying induce us to do things that will undercut the system that we are beholden to serve.” Then, he called her to lunch. “Well, Brooksley,” Federal Reserve chair said, “I guess you and I will never agree about fraud.” She asked why. He replied, “you think there should be laws against it.”

Next, the “dot-com” bubble. I write:

The magazine of the Democratic Leadership Council, which advocated for corporate interests within the Democratic Party and was closely associated with Bill Clinton, declared, “Thanks to the near-miraculous capabilities of micro-electronics, we are vanquishing scarcity.” Speculating in “dot-com” stocks became a popular mania; that year, the turn of the millennium, seventeen of thirty-six commercials during the Super Bowl in were for dot-coms. One of them advertised an online platform for day-trading by featuring a chimpanzee dancing euphorically beside two middle-age men in the garage of a modest, rundown ranch house that would, by inference, soon be rundown no more—cashing in the New Economy being so easy, allegedly, even a monkey could do it….Three weeks after the Super Bowl, the stock market peaked, then began a plunge that destroyed some $4.5 trillion in wealth.

Later in the book, I write about his policy response to that debacle: a doubling down of the easy-money policies that inflated the bubble in the first place.

Greenspan, seeking to keep the gilded party going after recession hit, cut interest rates to a historic low of 1% for two straight years. That recession happened after the bubble pumped up by made-up valuations for stupid dot-com stocked popped, which made other kind of investments more appealing, like houses, whose prices, thanks to those low interest rates, were booming at levels Cassandras soon pointed out better resembled graphs of tulip bulb valuations in 17^th century Holland than a boring necessity of life like a domicile. From this, Wall Street “innovators” spied opportunity to derive the most fantastically dynamic derivative of all: bonds bundling thousands of individual home mortgages.

You may recall what happened next: manic speculation in those bonds crashed the global economy, bringing the U.S. its highest unemployment rate in thirty years, a million homes foreclosed, a quarter of American households losing at least at least 75% of their assets, the total value of real estate in the U.S. plunging from $25 trillion to $18 trillion, and the income of the average middle class family going from $53,000 to $48,000—all in the space of five months. Jeremiahs, some from the left, others technical experts smack dab in the ideological mainstream with the highest possible credentials,

had no difficulty seeing what would come next. The problem was that they were patronized or ignored.

Edward Gramlich was one of seven members of the Federal Reserve’s Board of Governors and former acting director of the Office of Management and Budget. He published a study describing the subprime mortgage market as “a city with a murder law, but no cops on the beat.” Economics Nobelist Paul Krugman of Princeton and the New York Times shrilly warned in the middle of 2005 that Greenspan intentionally built America’s prosperity by seeding unsustainable runups in asset prices; but now he, and us, were “Running Out of Bubbles.” He cited nearly as distinguished an economics colleague, future Nobelist Robert Shiller, who had predicted the last stock market bust, and in 2003 published “Is There a Bubble in the Housing Market.” He now said housing prices were “the biggest bubble in U.S. history.”

In 2005, upon Greenspan’s retirement, when stocks in homebuilding firms were beginning their first portentous lurch downward,

central bankers from around the world gathered at the mountain resort of Jackson Hole for a symposium called “The Greenspan Era: Lessons for the Future,” to honor their hero upon his retirement. Raghuram Rajan, chief economist of the International Monetary Fund, presented a paper answering its title question “Has Financial Development Made the World Riskier?” in the affirmative. If was as if he had questioned the invention of the wheel. Larry Summers called him a “Luddite.” Nouriel Roubini, a former member of President Clinton’s Council of Economic Advisors, made a similar case a year later at an IMF meeting, predicting “a once-in-a lifetime housing bust…sharply declining consumer confidence….and the global financial system shuddering to a halt.” The audience literally laughed.

And what had the chairman of the Federal Reserve been saying during these years? That what was about to happen to the housing market was quite literally impossible.

Soon, a staggering third of homeowners were taking advantage of…“cash-out refinancing”: treating their houses like piggy banks, sometimes several times in succession—thus risking losing their collateral, the home in which they and their families happened to live, should its price collapse.

And all of this might have seemed rather risky—if the most trusted figure in the nation when it came to economic questions hadn’t kept insisting it was nothing of the kind.

In 2002, in one of his regular appearances before Congress’s Joint Economic Committee, Alan Greenspan called cash-out refinancing “a powerful stabilizing force over the past two years of economic distress.” At a conference in February of 2004, he suggested [“adjustable-rate mortgages,” or “Option ARMs,” which enticed buyers with below-market introductory “teaser” interest rates, which then “reset” after a specified interval to a high rate] were preferable to the traditional but “unduly expensive” fixed-rate mortgage, which was why he hoped lenders would provide even “greater mortgage product alternatives.” Later that year, to a meeting of community bankers, he minimized anxieties about “the rising ratio of household debt to income”—it was at a record high—and a precipitous decline in the household savings rate, by scolding those claiming that the “exceptional run-up in home prices” portended a “bubble,” because, this oracle insisted, a crash in house prices was impossible. “Housing price bubbles presuppose an ability of market participants to trade properties as they speculate about the future. But upon sale of a house, homeowners must move and live elsewhere. This necessity, as well as large transaction, are significant impediment to speculative trading and an important restraint on the development of price bubbles.”

He presented all this as a shimmering expansion of Martin Luther King’s dream: that,