In recent months the statements of Fed Chairman Alan Greenspan have become
increasingly confusing and self-contradictory. So much so, that an impartial
observer must conclude that his motives are somewhat less than honest.
This week, the Chairman was true to form as he continued misleading the
public with respect to the enormous risks facing the U.S. economy. Rather
than expressing an obvious concern over the increasing use of adjustable
rate mortgages (ARM’s) he instead praised them, encouraged greater use, and
expressed regret that too many homeowners were wasting money on fixed rate
mortgages. In the same speech he declared that the high levels of consumer
debt did not concern him because the cost of servicing that debt was so low.
Given that reality, one would assume he would hope most borrowers would lock
in those low rates. After all, when rates do ultimately rise, higher rates
would certainly make the debt load unmanageable. These comments are even
more peculiar given the concerns he expressed the following day over the
mortgages insured by Fanny Mae and Freddie Mac, as ARM’s have a much greater
default risk than do traditional fixed rate mortgages!
Rather than a reflecting the sophistication on the part of savvy American
home owners, as Greenspan suggests, the reality is that most homeowners are
choosing ARM’s because that it is either the only way they can afford to
buy a home, or it is the only way they can afford to make ends meet. The
average ARM is 50% larger than the average fixed rate, suggesting that the
larger the mortgage the more likely it is that the borrower needs the lower
payments to qualify. Also, financially distressed homeowners typically refinance
fixed rates mortgages into ARM’s to save money. In so doing, they trade the
benefits of lower current payments for the risks of higher future payments.
Given the facts that interest rates and domestic savings are at historic
lows, the budget and current account deficits are surging, commodities prices
are soaring, and the dollar is collapsing, this is perhaps the worst time
in history to make such a trade-off.
What Alan Greenspan is in effect saying to homeowners, or potential home
buyers, is “go ahead, get that ARM, don’t worry about rising interest
rates, I’ve got your back. It’s O.K. to pay $500,000 for that two-bedroom
town home that sold for $300,000 two years ago, because you can afford the
payments with an ARM. Can’t afford the car payments on that brand new imported
SUV? Just refinance your fixed rate mortgage into an ARM. After all, you’re
just wasting money with that fixed rate mortgage.”
Is it possible that Greenspan really is this naive? Or does he see the danger
posed by ARM’s, but does not want to acknowledge his concerns publicly? I
believe that he is so worried about the proliferation of ARMs that his comments
were intentionally designed to defuse any legitimate fears that may be developing,
particularly among America’s creditors, concerning this issue. Also, I believe
Greenspan’s comments are specifically designed to help keep the housing bubble,
and by extension the U.S. economy, expanding. Greenspan knows that the only
way most home buyers can afford these ridiculously high prices is with ARM’s.
Without them, housing prices would collapse. He also knows how important
re-fi money is to the U.S. consumer. Since long term interest rates cannot
fall low enough to facilitate another wave of fixed rate re-fi’s, he is trying
to encourage homeowners to re-finance on last time: fixed to ARM.
Isn’t it odd for Greenspan to even make recommendations concerning which
type of mortgage homeowners should choose? After all, he doesn’t comment
on what stocks investor should buy, or what bond maturities to favor. He
even refuses to comment on the dollar. You would think Greenspan would not
want to put himself into a position of having to raise interest rates after
encouraging home owners to refinance into ARM’s. Do such comments actually
tie his hands in some respect? Do they leave the Fed or the U.S. government
vulnerable to legal action from bankrupt ARM borrowers, who relied on the
chairman’s comments in their decision to opt for the riskier loan?
The reality is that such absurd comments by Greenspan further reveal that
his statements are more propaganda than sincere expressions of opinion. He
says whatever he thinks he has to say to sustain the bubble economy, regardless
of his personal beliefs. Everything he says is designed to postpone the day
of reckoning as long as possible, no matter how much worse that day will
become as a result. It is only when viewed from this perspective that Greenspan’s
comments make sense.