Yes, Greenspan Did It

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With
no one denying the obvious fact that America is in a deep slump
anymore, the discussion has instead shifted to why it happened.
The Austrians (including
me
) who predicted these problems based on Greenspan’s low
interest rate policy know of course that the main cause was that
low interest rate policy, with his numerous bailouts of failed financial
institutions also creating a moral hazard that encouraged risky
behavior.

But non-Austrians
who for various reasons seem determined to exonerate the central
bank have instead offered various other explanations. I will not
here answer them all, and will instead simply comment on the most
common alternative explanations and the various arguments used explicitly
for the purpose of exonerating Greenspan.

From the supply-side
Republican establishment who until 2007 and in some cases well into
2008 denied the existence of any serious problems the blame is cast
on Fannie Mae and Freddie Mac and the Community Reinvestment Act
(CRA). Despite having been so wrong, they are closer to the truth
than other deniers as the factors they blame did. Surely the fear
of being accused of violating the CRA made some lenders more willing
to lend to some low-income and minority households that really weren’t
credit worthy. And surely, the role of Fannie and Freddie in buying
up many of the mortgage-backed securities and then selling them
on with their guarantees helped increase such lending.

But there is
little reason to believe that either of those factors was more than
something that aggravated slightly the crisis. After all, both Fannie
& Freddie and the CRA had existed for decades without causing
anything similar to this. And most sub-prime loans were issued by
institutions not covered by the CRA, and the act itself isn’t
really that draconian as it says that lenders aren’t compelled
to make loans that are likely to be unprofitable. Similarly, lending
not covered by Fannie & Freddie expanded rapidly too during
the bubble.

One argument
that particularly left-wingers have advanced is that "deregulation”
or "lack of regulation" is the cause of the problems.
Rarely do they specify exactly what regulations they refer to. (I
suspect that many simply have such great faith in government that
there must be some lack of regulation that causes any problems.
What regulation is unimportant to them) Often it is said that securitization,
and lack of regulation of it after the repeal of the Glass-Steagall
Act, is the problem.

Read
the rest of the article

January
3, 2009

Stefan
M.I. Karlsson [send
him mail
] is an economist working in Sweden. Visit his
blog
.

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