Greenspan: "We lost control of long-term rates"

[DanS]

An extraordinary statement. He basically washes the Fed's hands of the real estate bubble. Did the central bank ever have control? Could the central bank stop a meltdown like the Great Depression?

When the Fed began to raise rates in 2004, the central bank had expected to get — "as a bonus" — a rise in mortgage rates, Greenspan said. But that didn't occur, he said.

"We concluded that the monetary forces that were arising in the world globally had become so overwhelming, relative to the resources of central banks, that we had effectively lost control of long-term interest rates and the forces directing higher prices and homes," he said.

Asked if the Fed could have prevented, or eased, the U.S. housing bubble, he said, "There's only one thing we could have done — cutting off short-term credit. But that would have broken the back of the economy and brought the housing boom down."

Short of raising interest rates dramatically, "the evidence is very clear that there was nothing that any central bank could have done, or tried to do."

http://www.npr.org/templates/story/story.php?storyId=17210282

[Lefty Scaevola]

The Fed has rather limited influence over long term rates, which are primarily dictated by market factors. The Fed's principal power lies in short term liquidity and short term rates between banks which then flows into, but does completely control, other short term rates

[snoopy369]

It makes some sense to me ... with the 'sub prime' lending at higher than prime interest rates being the root of the problem (and I would suggest usually being the root of the problem - safe loans don't cause any real risk of loss to banks, it's typically the riskier loans that cause trouble when they default en masse), the central bank might have less control.

I wouldn't say no control, though. Presumably somebody in these banks is looking at the loans and saying, "Well, we can either take this money and make (PRIME+1)% safely on 'prime' mortgages, or take this same money and make (12)% at a (RISK)% rate on sub-prime mortgages. Let's roll the dice." If (Prime+1) = 5 and (RISK) = 80 (80% expected return, net of forclosure gains/costs) then return = .8(.12) - (.05) = (.046), while if (Prime+1) = 8 then return = .8(.12) - (.08) = (.016), which is a more difficult call, and if risk suddenly baloons to a 60% expected return, then .6(.12) = .72 and now the decision is much easier for the Prime=7 rate (.08 safe vs .072 risky), but is still probably in favor of the risky rate at the .05 safe rate.

The only time this wouldn't be the case is if there is no longer enough 'safe' mortgages such that even in a 'risky' market (say, .08 prime vs .072 expected subprime) then you still choose to take a significant proportion of 'risky' loans regardless of the amount of prime loans. At that point we need to start considering increasing the ... what's it called, the amount of cash a bank must have on hand versus loaned out. Not enough caffeine apparently this morning.

[pchang]

Worse than washing his hands

Forget about trying to duck responsibility for the housing boom. Now, he wants the government to hand out cash to homeowners who can't pay their mortgages. In the words of Charlton Heston, "You can take it out of my dead, cold hands!".

[DinoDoc]

I thought he retired. What's with all the policy statements?

[snoopy369]

When you're retired you can much more easily make policy statements, since there's no responsibility or accountability for them

[MRT144]

greenspan doesnt want his image tarnished, but I will make sure that it will.

[Kidlicious]

Re: Greenspan: "We lost control of long-term rates"

Originally posted by DanS
Did the central bank ever have control? Could the central bank stop a meltdown like the Great Depression?

They could have control of long term rates if they targeted long term rates. I suppose that could get messy though.

But no, the Fed can't stop a meltdown. I didn't know anyone ever thought that they could. All they can do is fine tune.

[Kidlicious]

Originally posted by DinoDoc
I thought he retired. What's with all the policy statements?

I suppose to make your successor look like an incompetent boob. That ought to help the markets, eh.

[DAVOUT]

Another interesting statement he made recently : the FED should raise its inflation target from 2% to 5%.

[Addled Platypus]

what the f'eds need to do is stop telling business's how to run, who to do business with

and concentrate on the real issues like the US deficit

and now they are thinking about "asking" the automakers to improve the mpg

is like asking a dog not to lick himself

speaking of dgs,,,


and HRC thinks the Gov'ment knows to keep costs down with health care