Greenspans Sage Advice
Fleck points out very clearly, that Ex Fed Head Alfred E. Greenspun not only started this party, but cheered it on...
On Feb. 24, 2004, in a speech titled "Understanding Household Debt Obligations," he told homeowners that they had been acting too conservatively and that it was costing them a lot of money:
"One way homeowners attempt to manage their payment risk is to use fixed-rate mortgages, which typically allow homeowners to prepay their debt when interest rates fall but do not involve an increase in payments when interest rates rise...
Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade."
Greenspan then reiterated the point for all the slow learners as follows:
"To the degree that households are driven by fears of payment shocks but are willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive way of financing a home."
He also invited the mortgage industry to get with the program:
"American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage."
Anyone who took that advice from the man who was in charge of setting interest rates at the Fed cannot be happy.
In the ensuing two years, the federal funds rate more than doubled in a series of 11 rate increases.
Of course, as the mortgage-for-anyone-with-a-pulse party was in full bloom, Greenspan was busy cheerleading.
In a speech April 8, 2005, Greenspan extolled the virtues of sublending:
"With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers...
As we reflect in the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial-services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means...."
We now have millions of homeowners with too much debt and an unknown number of financial institutions that are holding the debt.
This predicament is not dissimilar to the one Japan faced in the 1990s, which ultimately saw equity and real-estate prices decline 80% over a decade.
On Feb. 24, 2004, in a speech titled "Understanding Household Debt Obligations," he told homeowners that they had been acting too conservatively and that it was costing them a lot of money:
"One way homeowners attempt to manage their payment risk is to use fixed-rate mortgages, which typically allow homeowners to prepay their debt when interest rates fall but do not involve an increase in payments when interest rates rise...
Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade."
Greenspan then reiterated the point for all the slow learners as follows:
"To the degree that households are driven by fears of payment shocks but are willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive way of financing a home."
He also invited the mortgage industry to get with the program:
"American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage."
Anyone who took that advice from the man who was in charge of setting interest rates at the Fed cannot be happy.
In the ensuing two years, the federal funds rate more than doubled in a series of 11 rate increases.
Of course, as the mortgage-for-anyone-with-a-pulse party was in full bloom, Greenspan was busy cheerleading.
In a speech April 8, 2005, Greenspan extolled the virtues of sublending:
"With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers...
As we reflect in the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial-services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means...."
We now have millions of homeowners with too much debt and an unknown number of financial institutions that are holding the debt.
This predicament is not dissimilar to the one Japan faced in the 1990s, which ultimately saw equity and real-estate prices decline 80% over a decade.
Comments