The Maestro Won’t Face the Music

In a television interview late last week, the former US Federal Reserve Chairman Alan Greenspan cast his eyes over the charred landscape of America’s national real estate market and offered high-minded criticisms of the obvious excesses and irrationalities that brought on the devastation.

Greenspan’s attitude was akin to that of a retired drug dealer lamenting the urban blight caused by rampant addiction. He noted that US housing prices were still too high, that too many homeowners were upside down on their mortgages, and that Fannie Mae and Freddie Mac were accidents waiting to happen. This serial bubble blower doth protest too much. And, while it might seem a uniquely American story, it isn’t. The housing meltdown has had effects far beyond US shores, pulling down Asian bank shares. The US government bailout of the two has made US institutions, not to mention the World Bank and the IMF, look hypocritical in their constant urging for Asian goverments to become more transparent.

The US’s housing bubble was Greenspan’s doing pure and simple. He gave birth to it, nurtured it, protected it, and guided it during every stage of its development and now the financial world is paying the price. In fact, if there was a deck of playing cards featuring the key players in this debacle, Alan Greenspan would be the ace of spades. The fact that America’s media still holds this joker in such high esteem is a testament to just how clueless they are. Rather than fawning over his every word, journalists should be grilling him like a CIA interrogator.

In his new post-Fed incarnation, Greenspan does show an increased willingness to speak the truth … perhaps because sharp candor generates higher speaking fees than the murky academic jargon he used to deliver regularly to the US Congress. However, conveniently missing from his belated admission that home prices are too high is that his irresponsible monetary policies propelled prices to those heights in the first place. In fact, even as the housing bubble was inflating, Greenspan repeatedly denied its existence. He took every opportunity to talk the real estate market up and went out of his way to justify irrationally high home prices.

His concerns about upside down mortgages are particularly offensive given his consistent praise, when he was fed chairman, of the ability of home equity extractions to fuel economic growth. In fact, during the final years of his tenure there was no greater proponent for cash out refinancing than Alan Greenspan. Not only did the Maestro, as he was named by the US journalist Bob Woodward, routinely commend homeowners for their sophisticated approach to “managing their home equity,” but he applauded Wall Street and mortgage lenders for their creativity and ingenuity. Of course, home equity extractions are largely responsible for so many homeowners now owing more than their homes are worth!

His most brazen contention was that he had tried to warn us of the dangers that Fannie and Freddie could pose to the entire economy. Excuse me, but when exactly did he sound this alarm? His points that Fannie and Freddie should not exist, and that the moral hazard of private profits and socialized losses is an accident waiting to happen would have been right on point had he actually made them while still Fed Chairman. Too bad Maria Bartiromo (famous as the Money Honey on CNBC-TV) did not remind Greenspan that the accident has already taken place. Fannie and Freddie’s flawed design may have rendered them destined to slip but it was Greenspan himself who supplied the banana peel.

Peter D. Schiff ( is president of Euro Pacific Capital, Inc of Darien, Connecticut, USA. He publishes the free, on-line investment newsletter