Implausible Denial: Don't Tell Me Nobody Knew the Housing Bubble Was Underway
by Bill Sardi
Recently by Bill Sardi: How To Prepare For Obamacare: Create Your Own Natural Medicine Chest
Was the current financial crisis intentionally created? If so, who would confess to such a scheme? Former Federal Reserve chairman Alan Greenspan recently testified that there was no way to know or avert the real estate bubble that began as cheap money (low interest rates) flooded the financial marketplace.
In Greenspan's own words, the real estate bubble and collapse was "a once-in-a-century event" and "we all misjudged the risks involved. Everybody missed it — academia, the Federal Reserve, all regulators."
Michael J. Burry, who ran the hedge fund Scion Capital from 2000 until 2008, writes in The New York Times that he anticipated a collapse in the subprime real estate market and liquidated most of his company's credit default swaps at a substantial profit.
Thereafter, Al Hunt of Bloomberg Television, who had learned of Mr. Burry's dire predictions, asked Mr. Greenspan directly about this and the former Fed chairman responded that maybe Mr. Burry's insights had maybe been a "statistical illusion." Says Burry: "Perhaps, he suggested, I was just a supremely lucky flipper of coins."
Mr. Burry says: "Instead, our leaders in Washington either willfully or ignorantly aided and abetted the bubble." The word "willfully" draws attention. This certainly wasn't an act of God like a hurricane. Willful destruction of the economy is something that will be explored further here in this article.
Recently Greenspan said that "accelerating the path of monetary tightening that the Fed pursued in 2004—2005 could not have ‘prevented' the housing bubble." Has god spoken or are we do investigate his assertion further?
Greenspan says "nothing could have prevented this" after quoting his long-time friend, Stanford University Professor John Taylor, who unequivocally claimed that had the Federal Reserve from 2003 to 2005 altered short-term interest rates, this would have prevented the housing boom and bust.
Oh, the avid crowd that reads LewRockwell.com (LR) certainly knew what was to come early on as the bubble began to expand. You can read these archived articles, "You Heard It Here First," and "Is The Housing Bubble Popping?," by Mark Thornton, a LR contributor, first published online in 2007 and 2005. But Alan Greenspan isn't a likely reader of articles at LewRockwell.com.
At least some people knew of the impending risks posed by low interest rates, set by the Federal Reserve. But how do we pin the tail on the right donkey here?
Some say the whole fiasco began in the Clinton Administration, but that wouldn't explain why a Republican President never raised an eyebrow over low interest rates.
In his New York Times article, Mr. Burry goes on to say that "Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come."
Before Mr. Greenspan's false assertion is exposed, that not even one economist warned of problems, readers need to understand how prospective American homeowners were swayed into buying homes they couldn't afford. They might also like to know that a 1999 report published in The New York Times DID warn of what was to come.
Cheap money and false opportunity
Cheap money began in 2001 as the Federal Reserve sat idly by, watching as the false demand for residential real estate began to expand an economic bubble that was destined to burst. Naïve home buyers were instructed to buy for investment, since real estate had a history of ever-rising property values. At least that was what the author of the infamous book "Rich Dad, Poor Dad" claimed.
Home prices were rising so fast that a whole new occupation was created — house flipping. Buy a home and resell it as fast as you can for a big profit. The underclasses felt this was their opportunity to make money that only privileged Americans had access to.
But when monthly mortgage payments rose to a point beyond affordability, the bubble burst, the value of homes plunged under their mortgage price, leaving millions of new homeowners with mortgage payments they could no longer make as "teaser" interest rates on home mortgages expired and their monthly house payments rose. Some 20 million empty homes later, the resale of foreclosed properties slowly became the growth sector in the real estate marketplace.
Certainly government ushered the naïve sheep into the debt corral by promoting the idea that home ownership was a right for all Americans, even low-income individuals. These first-time buyers didn't have their minds on the responsibility of home ownership — such as paying property taxes to support public schools, etc., nor did they even have funds to properly maintain their homes.
The promise of making a fortune on real estate — combined with liar's loans (no credit check), nothing-down, teaser interest rates, take out a second-mortgage to get some easy cash — was too tempting to resist.
The story of a hairdresser in Las Vegas who bought three homes for speculation with no down payment and later had to default on all three properties, was widely circulated. The hairdresser blamed her real estate agent for making promises of future wealth.
The federal government is first to blow up the bubble
The Federal government created the false real estate boom before the Federal Reserve later aided and abetted with cheap money. Fannie Mae, the nation's biggest underwriter of home mortgages, began targeting low-income groups to maintain its phenomenal growth in profits. Congress allowed them to continue, even though there was condemnation of Fannie Mae's policies.
New York Times writer Steven A. Holmes wrote on September 30th, 1999, that "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."
Holmes went on to quote a fellow at the American Enterprise Institute to say: "If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry."
So, how did reporter Holmes know and Greenspan didn't?
But maybe Greenspan doesn't read the New York Times?
Where did Greenspan get his information?
So did Greenspan, often shown in photos sitting at his desk with a vast library of books behind him, ever read reports written by the Federal Deposit Insurance Corporation (FDIC), which produces quarterly reports on the economy?
If Greenspan did, here is what he would have learned in early 2002.
"The nationwide third quarter 2001 ratio of seriously delinquent subprime mortgages was 7.3 percent, up from 5.5 percent one year earlier. Moreover, subprime delinquencies significantly exceeded those found among prime mortgages, as just under 0.5 percent of conventional prime mortgages were seriously delinquent." ~ FDIC Outlook, 1st Quarter, 2002.
The next spring, 2003, the FDIC issued a report which said:
After holding the federal funds target rate at 6.5 percent during the last half of 2000, the Federal Reserve reduced the rate eleven times in 2001, totaling 475 basis points. The additional 50-basis point rate cut in November 2002 brought the federal funds rate down to 1.25 percent. This aggressive policy of rate easing (fortuitously initiated two months before the recession officially began) pushed short- and long-term rates down to levels not seen for 40 years, which helped boost consumer spending in durable goods and housing.
Homeowners refinanced some $2.58 trillion single-family mortgages in 2001 and 2002, in many cases reducing monthly debt payments. Many refinancing borrowers also chose to liquefy some of the built-up equity in their homes by "cashing out" an estimated $145.3 billion. …. A recent study by the FEDERAL RESERVE (caps used for emphasis) estimates that refinancing activities may have contributed some $23 billion to consumer spending between January 2001 and March 2002.
The ability of the banking industry to continue to earn record profits in the face of commercial loan losses of this magnitude is uncertain.
This certainly means the Federal Reserve didn't have its head in the sand. It certainly knew the source of increased consumer spending emanated from the refinancing of residential real estate which had temporarily increased in value.
By the 1stQuarter of 2004 the FDIC's Cynthia Angell, Senior Financial Economist, who is forced to talk out of two sides of her mouth because her agency is funded by the banks, says the following:
U.S. home prices have risen briskly over the past several years, outpacing growth in disposable income. In terms of sales volumes, the housing sector had another banner year in 2003. This housing boom has raised concerns among some analysts about the possibility of a home price bubble and the specter of home prices suddenly collapsing.
…many observers, still smarting from the high-tech stock bubble of 2000, are uneasy over the longevity of this housing upturn and its seeming disconnect from fundamentals such as income. They fear an abrupt end to what they perceive as a bubble in the value of U.S. homes.
Hedging what she has to say about the impending collapse of the economy, Angell backs away from her warnings:
…this same history also strongly suggests that it is highly unlikely that home prices will fall precipitously across the entire country — even if rising interest rates raise the cost of mortgage borrowing and reduce housing affordability.
But then the FDIC's Angell returns to reality by saying:
Many of these buyers realized the American dream of home ownership only through low-down-payment, variable-rate mortgages obtained during a time of historically low interest rates. As interest rates rise, these homeowners may see their incomes strained by rising debt service costs, while slower home price appreciation limits their ability to build equity and lower their leverage.
Norman Williams, Allen Puwalski and Jack Phelps of the FDIC add comment to Angell's report by saying:
…there is a question regarding whether the household sector — the engine for banking growth through the 2001 recession and beyond — could falter. Sources of concern about households include rising indebtedness, the near-record pace of personal bankruptcy filings, and the possibility that consumer spending could tail off once the effects of the 2003 tax cut and the 2003 mortgage refinancing boom run their course.
So, Mr. Greenspan, where were you, hiding in a cave?
Yet even the FDIC gets seduced by the rock-and-roll profits generated by this false bubble in the economy. By the winter of 2006 an article in FDIC Outlook said:
"The US economy is now in its sixth year of expansion…. Only one FDIC-insured institution has failed over the last two and a half years."
But then the reader-beware paragraph follows:
Still, some negative trends have emerged for banks. They include a narrowing of net interest margins, particularly among larger institutions; increasing concentrations of traditionally riskier commercial real estate loans; and emerging signs of credit distress in subprime mortgage portfolios.
Alan Greenspan is no dummy. He knew the probable outcome of cheap money. He knew how to create and destroy wealth. He had foreknowledge, like most elite government and quasi-governmental chieftains, of the eventual outcome of misdirected government practices and bank-accounting infractions.
He certainly must have had knowledge of the precipitous federal budget deficits, under-funded pension plans (particularly for public employees), depleted bank reserves, lack of transparent accounting, lack of political will to reduce spending, and historical inflation produced by fiat money ŕ la the Federal Reserve itself.
Would a planned implosion of the US economy, and with it, destruction of the world economy, be a covert plan to force central bankers to compete on an equal basis as far as reserves and accounting standards are involved, and to force unions and private pension plans to trim retirement benefits, as well as force a single currency upon the world that could then be used to control outlaw central bankers? These are all questions worth asking.
If Greenspan didn't know and the FDIC economists did, why would the US Treasury Department, or the Executive Branch of the government, or Congress itself, not step in and call for a halt to practices that were destroying the economy? Yes, the Federal Reserve is somewhat independent of Congress and the government, but the existence of a Presidential plunge protection team suggests otherwise. The correct answer is, they all knew, Greenspan included. The Ship of State was intentionally scuttled, and it hasn't reached bottom yet.
April 9, 2010
Bill Sardi [send him mail] is a frequent writer on health and political topics. His health writings can be found at www.naturalhealthlibrarian.com. He is the author of You Don't Have To Be Afraid Of Cancer Anymore. His latest book is Downsizing Your Body.
Copyright © 2010 Bill Sardi Word of Knowledge Agency, San Dimas, California. This article has been written exclusively for www.LewRockwell.com and other parties who wish to refer to it should link rather than post at other URLs.