Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (44 page)

Americans could not escape the bombardment of consumer finance. From a radio ad in St. Louis: “If you own a home and have a pulse you can get a home equity loan.”
¹⁹
There were more choices than at a used car lot. The FLEX-ARM mortgage was designed to drive the homeowner to drink. Each month the lender sent the borrower a payment coupon that calculated four payment options: negative amortization, interest only, 30-year fixed and 20-year fixed terms.
²⁰

Speech Number Three and Congressional

Testimony—2003

On March 4, 2003, Greenspan addressed the Independent Community Bankers of America. He congratulated the bankers and encouraged them to keep up the good work. Greenspan told his audience that as “part of 2002’s process of refinancing, households ‘cashed out’ almost $200 billion of accumulated home equity” and “perhaps . . . half was used to finance home modernization and personal consumption expenditures.” This was clearly a good thing in the chairman’s mind. He loved any new technology, and here was an advance that cleaned out homeowners’ equity efficiently: “Even as recently as the late 1980s, a family that wanted to use housing
wealth
[author’s italics] to finance consumption would have faced an expensive and time-consuming process. . . . [O]nly in the last decade or so has secured borrowing against home equity become such a cost-effective source of credit.”
²¹

¹⁵
Ibid.
¹⁶
Noland, “Credit Bubble Bulletin,” February 21, 2003, p. 6.
¹⁷
California Association of Realtors.
¹⁸
Daniel Kadlec, “Cash Out Now! It Only Sounds Crazy. Here’s Why You Should Borrow against Your House and Buy Stocks,”
Time
, November 22, 2002.
¹⁹
Chuck Butler,
Daily Pfennig
, September 19, 2005; Everbank.com Web site.
²⁰
Stacey L. Bradford, “Mortgages Get More Exotic,”
Wall Street Journal.com
, July 25, 2004.

There were the naysayers. That spending one’s equity was driving Americans to the poorhouse. That rising home prices and spending the equity cushion reduced the margin of safety. Greenspan was having none of that. He told America that its financial footing was growing stronger every day. Testifying before Congress on July 15, 2003, Greenspan opined that this transfer of wealth—from homeowners to the automobile salesmen—was key to economic recovery: “The prospects for a resumption of strong economic growth have been enhanced by steps taken in the private sector over the past couple of years to restructure and strengthen balance sheets. . . . Nowhere has this process of balance sheet adjustment been more evident than in the household sector.”
²²

The household sector dove head first into cheap borrowing rates and bid up asset prices to unsustainable levels. Greenspan acknowledged this, in his euphemistic manner: “On the asset side of the balance sheet, the decline in longer-term interest rates and diminished perceptions of credit risk in recent months have provided a substantial lift to the market value of nearly all major categories of household assets.”
²³
House prices traded up; mortgagees spent their equity back down. The people’s representatives did not find this disclosure alarming.

²¹
Alan Greenspan, speech to the annual convention of the Independent Community Bankers of America (via satellite), March 4, 2003 “Home Mortgage Market”.
²²
Alan Greenspan, “Federal Reserve Board’s Semiannual Monetary Policy Report to the Congress,” Before the Committee on Financial Services, U.S. House of Representatives, July 15, 2003.
²³
Ibid.

Greenspan very rarely used the word
debt
. He did before Congress, and he found it a virtue: “On the liability side of the balance sheet, despite the significant increase in debt encouraged by higher asset values, lower interest rates have facilitated a restructuring of existing debt.”
²⁴
Restructuring applied to the terms of loans (lower rates and longer maturities), but the only restructuring that reduces the level of debt owed is a write-off.

The economy had officially exited recession, but one of the glaring deficiencies of the recovery was the atrophy of industry. The chairman told the House Committee on Financial Services not to worry: “Is it important for an economy to have manufacturing?” No, was Greenspan’s answer. A thriving economy depended upon the value created, and this could be accomplished by “fabricating . . . something consumers want . . . or by various services consumers want.” He claimed that both goods and services produce the same standard of living. In either case, “the capability to purchase goods is there.” National defense considerations aside, “[I]t does not really matter whether or not you produce goods.”
²⁵

Pandering to the interests discussed in the previous chapter, he dismissed concerns about production at a time when production was collapsing. Manufacturing jobs decreased by 3.1 million between 1998 and 2003: a fall of 18.3 percent. This was the largest percentage drop since the Great Depression.
²⁶
Between January 2001 (the recent recession officially started in March 2001) through the end of 2003, consumer spending accounted for 101.6 percent of “real” GDP growth.
²⁷

What was America making? The man from Nehemiah said that houses were “little prosperity factories.” Whoever was right or wrong about production, we learned in November 2003 that, over the past two years, 750,000 hightech jobs had been lost and 125,000 Americans had become real estate agents.
²⁸
By 2006, at least 600,000 people sold mortgage loans in California.
²⁹

²⁴
Ibid.
²⁵
Noland, “Credit Bubble Bulletin,” July 25, 2003, p. 8, quoting Greenspan, “Federal Reserve Board’s semiannual monetary policy report to the Congress.”
²⁶
The Richebächer Letter
, January 2004, p. 4.
²⁷
The Richebächer Letter
, February 2004, p. 4.

Speech Number Four, a Date to Remember:

February 23, 2004

On January 4, 2004, Ben Bernanke predicted that “2003 will be remembered as the year when this recovery turned the corner.”
³⁰
He celebrated the “diversified and resilient U.S. economy,” ignoring or unaware that over 100 percent of the socalled recovery was produced by consumer spending. Bernanke was another who ignored debt, but his influence was (and is) more dangerous than Greenspan’s. His was the voice of the academic and Washington policymaking establishments a consortium whose models needed to hush up the influence of debt balances to rationalize such an unbalanced economy.

If the economy had turned the corner, it is difficult to understand the motivation behind the chairman’s speech of February 23, 2004. He addressed the Credit Union National Association in Washington. In a startling performance, Greenspan tried his best to convince Americans their best interests would be served by grasping for the highest-priced houses by means of the riskiest loans.

He opened his pitch by noting, “American homeowners clearly like the certainty of fixed mortgage payments.” He advised insulated Americans to look overseas, “where adjustable-rate mortgages are far more common. . . . Fixed rate mortgages seem unduly expensive to households in other countries.” He informed his constituents that the “traditional fixed-rate mortgage may be an expensive method of financing a home.”
³¹

²⁸
“750,000 HighTech Jobs Lost in Two Years,”
Financial Times
, November 19, 2003. Ron Peebles, Prudent Bear Web site, November 18, 2003; number of real estate agents from National Association of Realtors.

²⁹
Seth Lubove and Daniel Taub, “Subprime Fiasco Exposes Manipulation by Mortgage Brokers,” Bloomberg, May 30, 2007.
³⁰
Ben S. Bernanke, “Monetary Policy and the Economic Outlook: 2004,” speech at the American Economic Association, San Diego, California, January 4, 2004.
³¹
Alan Greenspan, “Understanding Household Debt Obligations,” speech at the Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C., February 23, 2004.

The most famous civil servant since Caligula’s horse continued: “[M]any homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages over the past decade.” He went on to acknowledge that “this would not have been the case, of course, had interest rates trended sharply upward.” This was his only acknowledgment that his infomercial only worked in one direction.
³²

It cannot have been a coincidence that Greenspan was addressing the Credit Union National Association in Washington. The Federal Reserve chairman pushed risky mortgages in the same week that the California Association of Realtors announced that house price sales in the state had risen 20.7 percent from a year before and those in Los Angeles County had increased 27.4 percent.
³³
By June 2005, the median California residential house price cost $542,720.
³⁴

The next week, speaking before the Economic Club of New York, Greenspan inferred that interest rates would rise.
³⁵
Three months later (on June 30, 2004), the Federal Reserve raised the federal funds rate.

Few people read speeches by Federal Reserve governors. However, almost everyone wanted to know what Greenspan had to say, on whatever topic, on whatever day—in 30 seconds or less. The February 24
Wall Street Journal
exclaimed: “In a rare evaluation of the interest-rate options that households face, Federal Reserve Chairman Alan Greenspan questioned whether homeowners are well-served by popular fixed-rate longterm mortgages.”
³⁶
The title of the article said it all: “Fed Chief Questions Loan Choices.”

Whether this was the launching pad or not, mortgage mania was reaching a feverish pitch. Manhattan apartment prices rose 23 percent between January and March 2005 (from an average price of $987,257 to $1.21 million).
³⁷
Over 20 percent of Californians who bought houses over the previous two years devoted more than onehalf of their earnings to mortgage payments.
³⁸
In Colorado, banks lured illegal aliens into loans that were insured by the federal government. “They didn’t even have to come up with any money. . . . They just moved in,” and some immediately went into default, moaned the local district attorney.
³⁹

³²
Ibid.
³³
“Median Price of a Home in California Increases 20.7 Percent in January, Sales Up

5.3 Percent, C.A.R. Reports,” PR Newswire, February 25, 2004.
³⁴
Noland, “Credit Bubble Bulletin,” August 5, 2005, p. 8.
³⁵
Alan Greenspan, “Current Account,” speech at the Economic Club of New York,

New York, March 2, 2004.
³⁶
Greg Ip, “Fed Chief Questions Loan Choices,”
Wall Street Journal
, February 24, 2004.
³⁷
Noland, “Credit Bubble Bulletin,” April 1, 2005.

Across the country, house prices rose 13.6 percent between the second quarter of 2004 and 2005, the fastest pace since 1979, an earlier period of runaway inflation. In July, the National Association of Realtors was worried: “The most notable problem in the housing market is the shortage of homes available.”
⁴⁰
In August, the
New York Times
reported: “[N]ew homes are going up faster now than they have in more than 30 years. . . . Large tracts of Queens, once home to factories and power plants, are being readied for apartment complexes[.]”
⁴¹

Earlier in the summer, the
Times
alerted its readers: “For two months now, federal banking regulators have signaled their discomfort about the explosive rise in risky mortgage loans. . . . Then they expressed worry about the surge in no-money-down mortgages, interest only [mortgages] and ‘liar’s loans’ that require no proof of a borrower’s income. The impact so far? Almost nil.”
⁴²

Why? Steve Fritts, associate director for risk management policy at the Federal Deposit Insurance Corporation (FDIC) explained: “We don’t want to stifle financial innovation. We have the most vibrant housing and housing-finance market in the world, and there is a lot of innovation.”
⁴³
That the Federal Reserve and alphabet soup bureaucracies encouraged, rather than warned, was unpardonable. That current proposed legislation would give such organizations more power is a disgrace.

³⁸
Jim Christie, “California Home Buyers Stretch to Afford Homes,” Reuters, August 18, 2005.
³⁹
Ross Wehrner, “Colorado Authorities Indict Real Estate Agent Loan Officer for Forgery,”
Denver Post
, July 14, 2005.
⁴⁰
Noland, “Credit Bubble Bulletin,” July 15, 2005, p. 8.
⁴¹
Jennifer Steinhauer, “Housing Boom Echoes in All Corners of the City,”
New York Times
, August 4, 2005.
⁴²
Edmund L. Andrews, “Loose Reins on Galloping Loans,”
New York Times
, July 15, 2005, p. C1.
⁴³
Ibid.

In October 2004, Greenspan had told the America’s Community Bankers Annual Convention “the surge in cashout mortgage refinancings likely improved rather than worsened the financial condition of the average homeowner.”
⁴⁴
Possibly, the Federal Reserve chairman allayed lenders’ doubts about their borrowers creditworthiness, since, by July 2005, 42 percent of first-time home buyers were putting no money down.
⁴⁵

Playboy
’s May 2005 Playmate, Jamie Westenhiser, decided to really make some money when she joined the world’s hottest profession. Her goal: “a successful career in real estate.”
⁴⁶
She had company. California’s Department of Real Estate doubled the number of test centers for such career moves.
⁴⁷

On it went: in Sunny Isles Beach, Florida, Carlos and Betti Lidsky had bought and sold two condominiums and bought and sold two houses within six months. None of the homes had been built. The couple made a half-million-dollar profit. “It is much better than the stock market,” according to Mr. Lipsky.
⁴⁸
Heavenly skyscraper ambitions have always been indicators of tops. This time would not be the exception—but with a twist. Now the skyscrapers were for living, not working. In May 2005, two 110-story hotel and apartment buildings were proposed in Miami.
⁴⁹
A 2,000-foot, 115-story condominium was planned in Chicago.
⁵⁰