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Greenspan gets amnesia

Greenspan gets amnesia

Today, in his prepared remarks before the U.S. Senate Banking Committee, Alan Greenspan, who recently extolled the virtues of adjustable rate mortgages, expressed confidence in the ability of the U.S. economy to withstand higher interest rates in part because “a large fraction of households have long-term, fixed rate mortgages.” He further commented that as households had “extended the maturities of their liabilities,” that they were “therefore less exposed to destabilizing interest rate spikes.”

Greenspan completely ignores the significant percentage of Americans who took his recent advice and did just the opposite, choosing adjustable rate and interest only mortgages where today’s artificially low interest rates are only locked in for brief periods of time. Indeed, while the majority of mortgages are of the long-term fixed-rate nature, the majority of mortgage debt recently accumulated is not. Indeed, in the areas of the country where housing prices are the most extended, the proliferation of ARM’s is the highest. Under normal circumstances, ignoring this threat would be disingenuous, but given his previous endorsement of ARM’s, it is completely irresponsible.

Greenspan also conveniently omits the fact that the Federal Government itself failed to lock in these low rates for the benefit of the American taxpayer. Instead of taking advantage of the low rates by issuing more thirty year bonds, the Federal Government increasingly refinanced its debts by issuing short-term bills and notes, resulting in the average maturity on the entire $7.5 trillion national debt now being less than three years. Did Greenspan simply forget this fact, or are the implications to ominous for him to mention?

It is also disturbing just how cavalierly Greenspan dismisses the capital losses which he predicts creditors and financial intermediaries will suffer as a result of rising interest rates. He seems to feel that since such parties are profitable and well capitalized, that they can therefore afford the losses. One wonders just how profitable and well capitalized those parties will actually be in the aftermath of such losses, or if simply the ability to afford losses means that they exact no real economic toll.

During the question and answer period which followed his prepared testimony, Greenspan repeated previous performances by saying exactly what he believes everyone wants to hear, only doing so as vaguely as possible. He managed to avoid directly answering any questions pertinent to the ongoing and systemic fiscal and monetary imbalances threatening the American economy while deliberately creating the false impression that all is well. Perhaps the only truly honest words he spoke were uttered as part of his prepared remarks when he reminded the Senate that “inflation is a monetary phenomenon,??? meaning that inflation is caused by overly accommodative monetary policy. Now, if only someone would remind Greenspan.

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