And Then the Roof Caved In

Chapter 4

Eyes Wide Shut

 

 

 

As the frenzy in subprime lending was taking shape, Alan Greenspan was oblivious. It’s not that he didn’t see signs of a housing boom. “Our extraordinary housing boom cannot continue indefinitely,” he warned his colleagues on the Federal Open Market Committee (FOMC) in November 2002. But the boom that Greenspan saw taking shape was, in his mind, a typical housing boom in which prices would advance at too quick a pace and might then fall back a bit, or rise at a far slower rate. “There has always been an uptrend in home prices in the United States, largely because we don’t have very much productivity in housing, because we customize our houses, which is anathema to productivity growth. And the history of home prices in the United Sates is that they go down very, very rarely,” Greenspan told me.

He says the Fed was monitoring the rise in home prices relative to what an equivalent home would rent for and was fully aware that owner’s equivalent rent was forecasting an ever-decreasing rate of return on home purchases.“You go through 50 or 60 years of experience with virtually no declines and you somehow believe that’s the norm, and it is, except for the crisis that happens once in a century,” Greenspan told me during our September 2008 interview.

A Warning Unheeded

One can forgive Greenspan for not foreseeing that a massive rise in mortgage defaults by people with poor credit who had been given mortgages they couldn’t pay back would trigger an economic ...