Greenspan’s Defense

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

via Alan Greenspan Says the Federal Reserve Didn’t Cause the Housing Bubble – WSJ.com.

I can understand why Greenspan wants to salvage his reputation, but I think he misses the point. The terrible overreach in house buying was caused by all of the creative mortgage products such as ARMs, teaser rates, low doc loans, etc. Why did all these novel (and ultimately toxic) financing options suddenly appear? Low short term rates made them possible. Bi-partisan support of various “affordable housing” initiatives made them politicially desirable. I think that Chairman Greenspan bears much of the blame while acknowledging that doing the right thing would have made him a punching bag for politicians.

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