Thursday, September 13, 2007

The empire strikes back.....

Greenspan Acknowledges He Failed to See Early on the Risks of 'Subprime' Mortgages

When he was at the helm, Greenspan maintained there was little the Fed -- which also oversees the safety and soundness of banks -- could do about the subprime situation. One of the Fed's governors, however, had raised a red flag about questionable lending practices.

"Well, it was nothing to look into particularly because we knew there was a number of such practices going on, but it's very difficult for banking regulators to deal with that," Greenspan said in the interview.

Some blamed Greenspan's interest rate policies for feeding the housing frenzy. Sales had hit record highs and house prices galloped from 2001 to 2005. Then the market fell into a deep slump.

The Greenspan Fed from early 2001 to the summer of 2003 had slashed interest rates to their lowest level in decades. It was done to rescue the economy from the blows of the bursting of the stock market bubble, the 2001 recession, the terror attacks and a wave of accounting scandals that shook Wall Street.

Critics say the Fed kept rates too low for too long, encouraging a Wild West mentality in housing.

Greenspan, however, defended the institution's actions.

"They are mistaken," he said of the critics. "It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low," he said.

Bear with me folks while I make a couple of observations.

1. As I recently pointed out, the fed funds rate was too low according to the Taylor Rule in 2004 and 2005 as well as in 2001-2003. Even though the Fed was raising rates in 04/05, economic conditions were calling for larger and faster rate increases.

2. We have GOT TO STOP ALLOWING/EXPECTING THE FED TO MICRO MANAGE THE ECONOMY!!! "It was our job to unfreeze the American banking system if we wanted the economy to function". In 2001-2003? Are you freaking kidding me?

The Fed needs to target either the price level or inflation and forget all this unfreezing and bubble popping and fine tuning nonsense. Central Bankers: get over yourselves. Yer doin' it wrong!