Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Low US interest rates ignited unsustainable asset bubbles - Connecting the dots

Interest-Rates / Analysis & Strategy Jan 26, 2007 - 04:17 PM GMT

By: Dr_Martenson

Interest-Rates

Can you possibly stand another article about Greenspan? If the answer is “no” I completely understand – I too am ready to let the man take his place in history next to the buggy whip – but he was responsible for something that will be resonating in your life for a very long time. 

Since I've already typed two complete sentences and am still on topic, I think it's time for a detour. So let me tell you that I am cursed with a brain that connects dots. Worse, my brain likes to store things up as though random news items were potatoes and a particularly vicious Polish winter were on the way. The fact that I live in the US only confuses things all the more. 

But that's not the point. The point is that Alan Greenspan is either depraved or a fool and, of the two, I am not sure which I feel worse about as describing the man who was at the helm of the monetary bobsled during the longest stretch of paper credit expansion the world has ever seen.


Let's play ‘connect the dots': 

1. In December 2002, private bankers warned Greenspan that consumers were taking on worrisome amounts of debt and that an unsustainable, interest rate driven housing bubble was fueling this behavior (page 22 of this linked document) .

2. In July of 2003 Greenspan lowered interest rates to one-percent (as in 0%, or one-point-oh ), an emergency rate, and held it there for over a year (see chart below).

3. In February of 2004 Greenspan advised Americans that they'd be better off with adjustable rate mortgages (ARMs) than they would with fixed rate mortgages.

4. In October of 2005, the new bankruptcy law, largely written by private banking lobbyists and insiders, was passed.

Here's how those data points look when plotted out on a chart of short-term interest rates:

data points look when plotted out on a chart of short-term interest rates:

To summarize; (1) Mr. Greenspan was warned that he was igniting an unsustainable asset bubble, (2) he threw more gasoline on the fire, (3) he then advised consumers to switch to ARMs right before what he knew (for certain) would be a protracted period of rising interest rates, and then (4) kept mum while bankers worked feverishly to pass bankruptcy legislation that was indisputably banking-friendly but a consumer nightmare. Kind of sounds odd when you put out there like that doesn't it?

Now here's the interesting part about the story. To consumers, Adjustable Rate Mortgages (ARMs) are good or bad depending on whether interest rates are rising or falling. When interest rates fall the ARM adjusts down with them. The reverse is true when rates are rising.

As the following highly technical table makes clear, you really, really don't want to be holding an ARM during a rate hiking campaign.

Table 1

Interest Rates
Mortgage Type

Rising

Falling

ARM

BAD, BAD, BAD

Good

Fixed (Conventional)

Good

Bad

Clearly, when interest rates are about to embark on a sustained rise the best advice to consumers would be to lock in a low rate conventional mortgage.

But when we refer to the four data points in the chart above, we observe that Mr. Greenspan advised consumers to take advantage of ARMs right before the onset of what he knew would be a multi-year rate hiking campaign. Obviously he advised people to do the exact opposite of what they should have done. Why did he do that?

We can look at this two ways. On the one hand we could assume that Mr. Greenspan is a very poor banker and that despite his long career in banking he did not have access to the requisite highly technical information (see Table 1, above) and was simply unaware that it was very bad advice to steer people towards ARMs mere months before the onset of a protracted rate hiking campaign. On the other hand we could assume Greenspan knew exactly what he was doing and conclude that his motivations lay with shielding the banking industry from rising interest rates by cajoling consumers into ARMs at the very worst possible moment in the past 50 years.

Naturally, I'd like to assume the best but given the two options, I'm not sure which horse to root for. If I hope he was just a fool, what hopes should I pin on our chances for an agreeable resolution to the credit bubble he created? And If I'm to assume that all his actions were a depraved attempt to shield large banking institutions from a bit of risk then I need to accept the possibility that all of his policies were geared towards promoting institutions over people.

So which is it?

History will tell, but the early returns suggest you would be better off getting your financial advice off the back of a Wheaties box than you would from Mr. Greenspan. 

As for me, I'm wondering what to do with all these potatoes.

All the best,
Chris

Trivia question:  Who was in attendance at that 2002 meeting with Greenspan? 
Answer:
Ben Bernanke.

By Dr. Chris Martenson
http://theendofmoney.com

Dr Martenson is the creator of The End of Money economic seminar series, has extensive experience analyzing and communicating financial information.  Dr. Martenson combines a scientist's attention to fact and analysis (PhD, Duke University, Pathology and Toxicology) with a solid understanding of finance and economics (MBA, Cornell, Finance) with strategic thinking (4 years as a management consultant) to produce an insightful and powerful lecture. He is currently devoted to researching, writing and presenting economic and financial analyses delivering his message via his website, lecture series and is currently working on a related book & movie.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in