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URL:  http://boards.fool.com/confessions-of-a-fed-chief-25903936.aspx

Subject:  Confessions of a Fed Chief Date:  9/15/2007  12:51 PM
Author:  Lokicious Number:  21639 of 36468

http://www.nytimes.com/2007/09/15/business/15greenspan.html?hp

Greenie's autobiography. I think all autobiographies should be titled "confessions of." At least Greenie's would be more interesting than Paris Hilton's.

The headlines, of course, are the Greenie trashes Bush: well, like duh! Greenspan, for all his faults, is someone who respects intellect.

What is more interesting, from the brief summary, is Greenspan's thinking that lies behind the housing bubble, and I think is a fundamental contradiction in his ideology versus application.

Greenie believes in private property in an ideological way, meaning he thinks that owning property causes people to be more supportive of capitalism and, therefore, less interested in relying on government (or, left unsaid, collective bargaining). So, he wants to promote home ownership.

However, being a free market guy, he wasn't interested in the more socialist approaches to promoting home ownership, which I think are, in fact, far more fiscally responsible. FHA and Freddie and Fannie as government agencies, and various other more focused home ownership programs, not to mention the home mortgage and property tax deductions, all aim to promote home ownership. The basic idea behind loan guarantees for home owners is to take home owners who would be deemed too high risk to afford a mortgage at a low risk rate and help them qualify for the low rate. The point is to find people who are not really high risk if life goes according to plan, but are marginally risky in their current situation. Typically this would be someone whose current earning power makes the mortgage payment too high a % of income, but if income goes up, even if just keeping pace with inflation, after a while the mortgage payment becomes less burdensome. However, if they waited for income to go up, so would housing prices, so they could never afford to buy. But lenders who made these loans, to get guarantees, would have to make careful checks of client finances, and the loans would have to be affordable, even if the buyer had to tighten belt elsewhere to make ends meet.

Greenie's free market approach was basically to make money cheap for lenders and let markets work things out. So, he ignored obvious concerns about predatory and risky lending practices and the obvious point that when teaser rates go up there is no reason to expect a new and cheaper loan to materialize.

I think this a typical Greenspan contradiction; free market in theory but willing to use some regulatory mechanisms to affect markets, which are not necessarily to best regulatory mechanisms, just ones that he can pretend are not regulatory. At least it is a little better than people who decry government spending, unless it goes to well connected private contrators who do a worse job for higher cost.
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