Devoted to Managers and those that seek to improve their management skills

In an excellent piece written in the online Wall Street Journal, Sen. Jim Bunning (R., Ky.) offers a good look at the role Alan Greenspan has played in the housing and mortgage problems in the U.S., that are now affecting the world.

If you haven't noticed it, Greenspan has been on the sidelines giving potshots at those he blames for the problems, while not pointing the finger at himself.

In Bunning's article, he says Greenspan had a flawed monetary policy and was an absentee regulator, which were key instigators of today's problems.

He starts off with the response of Greenspan to the dot-com bubble, which he responded to by raising interest rates, which drove the economy into recession.

Facing those problems, then Greenspan swung the other way, too far in Bunnings opinion, where he decreased lending rates to as low as 1 percent. Those rates lasted about a year, and they remained below 2 percent for almost three years.

What this did of course was stimulate the housing market, where prices (which Greenspan admits) increased because of the low mortgage rates.

Greenspan doesn't add that what these low borrowing costs indirectly did was encourage high-risk in the financial markets, as investors put a lot of funds that were borrowed into a number of vehicles for mortgage lending, among other things.

If you've followed the debacle over the years, many people warned that this was happening, but the gold rush was on, and people abandoned rationale and were on an emotional fix they didn't want to come down from; they're coming down now.
 
Because of the artificial market created, many lenders and borrowers simply wanted to keep the good times rollin' and are now paying the inevitable price.

How they kept it going was by ignoring market forces and lowering the standards they usually operated under. That's what subprime mortgages are, loans borrowed to those normally not able to get them because of being higher credit risks.

In Bunning's opinion, Greenspan dropped the ball by allowing the game to go on, while looking the other way without any attempt at regulation.

Worse than that, Greenspan encouraged the problem by encouraging people to buy homes through adjustable rate mortgages, citing the money they would save. These mortgages are a major part of the subprime and mortgage problmes today.

That's not the end of Greenspan's part in the mess. A few months after encouraging borrowers to buy homes through adjustable rate mortgages, Greenspan than began a series of interest-rate increases which made the mortgages he encourages people to attain, unaffordable to them.

Bunning adds that he warned Greenspan about the effects of this policy if followed through on, and it "fell on deaf ears."

So Greenspan gave borrowers advice on what to do, and then not long afterward cut the feet out from under them by increasing interest rates, knowing the impact it would have.

Now Greenspan has been shooting little digs from the sideline, evidently not content with quietly going away. I'm starting to think what we're talking about in this post is why he's doing it. He's trying to create a smokescreen so the trail isn't discovered that it leads back to him.

It's a good lesson in how bureaucrats need to leave the market alone and let people take care of themselves.