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the advice Greenspan had on Feb. 24, 2004

(2007-09-08 22:44:29) 下一個
the advice Greenspan had for mortgage seekers and mortgage originatorsa couple of years back. On Feb. 24, 2004, in a speech titled"Understanding Household Debt Obligations," he told homeowners thatthey had been acting too conservatively and that it was costing them alot of money:

"One way homeowners attempt to manage their paymentrisk is to use fixed-rate mortgages, which typically allow homeownersto prepay their debt when interest rates fall but do not involve anincrease in payments when interest rates rise. . . . Indeed, recentresearch within the Federal Reserve suggests that many homeowners mighthave saved tens of thousands of dollars had they held adjustable-ratemortgages rather than fixed-rate mortgages during the past decade."

Continued: A legacy of misery

Greenspanthen reiterated the point for all the slow learners as follows: "To thedegree that households are driven by fears of payment shocks but arewilling to manage their own interest-rate risks, the traditionalfixed-rate mortgage may be an expensive way of financing a home."

Healso invited the mortgage industry to get with the program: "Americanconsumers might benefit if lenders provided greater mortgage-productalternatives to the traditional fixed-rate mortgage."

Anyone whotook that advice from the man who was in charge of setting interestrates at the Fed cannot be happy. In the ensuing two years, the federalfunds rate more than doubled in a series of 11 rate increases.

A legacy of misery

Likewise,the financial innovation Greenspan was advocating led directly to themortgage-related troubles that were the proximate cause for the recentdiscount-rate cut. Of course, as the mortgage-for-anyone-with-a-pulseparty was in full bloom, Greenspan was busy cheerleading. In a speechApril 8, 2005, Greenspan extolled the virtues of sublending:

"Withthese advances in technology, lenders have taken advantage ofcredit-scoring models and other techniques for efficiently extendingcredit to a broader spectrum of consumers. . . . As we reflect in theevolution of consumer credit in the United States, we must concludethat innovation and structural change in the financial-servicesindustry have been critical in providing expanded access to credit forthe vast majority of consumers, including those of limited means. . . .This fact underscores the importance of our roles as policymakers,researchers, bankers and consumer advocates in fostering constructiveinnovation that is both responsive to market demand and beneficial toconsumers."

Naturally, it was not until after the debacle unfolded that Greenspan warned banks about imprudent lending standards.

Unfortunately,while the equity bubble left little debt in its wake -- excluding thetelecom sector -- we now have millions of homeowners with too much debtand an unknown number of financial institutions that are holding thedebt. This predicament is not dissimilar to the one Japan faced in the1990s, which ultimately saw equity and real-estate prices decline 80%over a decade.

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