It looks like Alan Greenspan is about to cash in in a pretty big way.
Greenspan is due to collect $8.5 million for an upcoming memoir entitled The Age of Turbulence: Adventures in a New World, which to me sounds more like a science fiction novel as opposed to something by a former Chairman of The Federal Reserve.
In the book Greenspan will reportedly talk about how he withheld some information while testifying in front of Congress in order to keep the markets from overreacting; what it was like serving under Presidents Regan, Bush, Clinton and Bush; and that much of the book was written while laying in the bathtub – something that could test your gag reflex.
While all of this is fine and dandy, there’s one key element that Greenspan will probably have left out of his book: the fact that he will be remembered as the single largest contributor to this country’s financial downfall.
Don’t get me wrong, the American economy certainly saw some periods of tremendous growth under Greenspan’s watch, but I’m afraid that much of his policy during the later years of his reign will hurt this country for years to come.
For example, because Greenspan continued to drop interest rates after the market dump of 2000 – 2002, money became too easily available. What I mean by that is there was too much money floating around in the economy and because interest rates were so low, a lot of people were able to grab their slice of the pie, even if they really couldn’t afford it.
The two major examples of this are the boom (and subsequent bust) of the sub-prime housing market, something Greenspan championed, as well as the fact that during the last two years the American savings rate has gone negative – meaning we spend more than what we earn.
Let’s look at these two items individually, starting with sub-prime mortages. When interest rates were at their lowest, these mortgages may have made sense as people who otherwise might not have been able to afford a home were now able to do so. Unfortunately, it seems many of us weren’t looking long term and figuring if these same people would be able to afford their homes once the inevitable happened and interest rates began rising again.
What’s now happening now that housing market has cooled is more and more people are facing foreclosure because they can’t afford their current payments AND are unable to sell their home for a profit. In turn, this is causing the market to continue to stay cool and drive housing prices down even further.
The second item – a negative savings rate – can be attributed to cheap credit, both regular credit cards as well as home equity lines of credit. Because this money was so cheap to borrow, many people made rather large and sometimes unwise purchase (think of that huge, gas guzzling SUV sitting in your driveway), that they will be paying for for years to come.
And as interest rates jumped, the payment for these items jumped as well, and in many cases cause people to borrow even more money in order to cover their basic needs.
While I may be a bit harsh in laying all of this at the feet of Greenspan (after all, he just made the policy; he didn’t promote irrational spending), in the end I think we will look back and realize that many of his financial policies were completely ridiculous and at the root of our country’s financial collapse.