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The Media Can't Stop Sucking Up to Alan Greenspan

Instead of treating him like a wise man, make him pay J.P. Morgan's fine

Alex Wong/Getty Images News/Getty Images

It’s impossible to change the channel this week without coming upon the grinning face of Alan Greenspan. The former Federal Reserve chairman’s new book, The Map and the Territory, releases this week, and he’s spending it on a grand tour through media green rooms across the country, from CBSto NPR to the BBC. Even Jon Stewart treated him with kid gloves. By Friday he’ll have a Food Network show.

So far, he’s gone virtually unchallenged. He has said the 2008 financial crisis “was the first time ever that markets were broken and could not fix themselves” (ever hear of the Depression?), and that he “could have caught a number of different crises” during his tenure at the Fed (which begs the question of why he didn’t). Journalists have asked such penetrating questions as, "You were knighted. Does that come with a title or anything?" Even the tough-minded Binyamin Applebaum called Greenspan "one of the nation’s most astute economic observers." Overall, the media has presented Greenspan's book as part of a soul-searching quest for why he missed the greatest economic collapse in decades—a frame that is needlessly obsequious and suggests he was a bystander to the disaster, not a central actor.

Needless to say, anyone who’s paid attention to the economy the past few years knows how ridiculous it is to fete Greenspan, the main architect of the policies that led to the Great Recession. If we lived in a just world, we would put him on trial, not on television. And his penalty should be to scrounge up the funds to pay JPMorgan Chase’s $13 billion fine with the Justice Department.

After all, that fine penalizes JPMorgan Chase for duping investors into purchasing mortgage-backed securities it knew were stuffed with garbage loans. And nobody in America duped more people—investors, homeowners, you name it—into buying bad loans than Alan Greenspan. While chairing the Fed, Greenspan was in a perfect position to inform Americans about the unsustainability of the housing bubble and the overall threats to the financial system. But his allergy to regulation and unshakeable belief in the virtues of the free market led him to ignore the bubble and its risks, infusing investors and consumers with confidence that the run-up in home prices was perfectly normal. If misleading the public about the safety and soundness of the housing market is a crime, Greenspan is guilty. And he deserves some manner of punishment for that, not a week full of deference and respect.

The seminal moment in Greenspan’s misinformation campaign on housing was February 23, 2004. Home prices had already begun their epic rise. A new generation of subprime mortgage brokers, like Ameriquest and Countrywide, became massive companies overnight. And Wall Street banks demanded more and more loans from these brokers, part of a plan to buy them up by the thousands and package them into securities, selling them all over the world. The relentless pressure for more loans led the brokers to lower their standards and hand out mortgages to virtually anyone, using exotic products to make them attractive to moderate and low-income borrowers.

Chief among these were adjustable-rate mortgages (ARMs), which offered a low interest rate in the first couple years, resetting to a higher rate thereafter. These kept the initial payments low, and brokers sold the product by claiming that borrowers could always refinance before the rates changed, using the equity from a rapid price increase to take out cash and move into a new low interest rate. The proliferation of adjustable-rate mortgages expanded the home loan business, enabling securitization and inflating the housing bubble.

Greenspan spoke before the Credit Union National Association on that February day in 2004, and he took the opportunity to extol the virtues of adjustable-rate mortgages. “Recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade,” Greenspan said, arguing that fixed-rate mortgages extract a high cost for protecting households against a sharp rise in interest rates. “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage,” he concluded.

There’s a kernel of truth to this. The research did show a benefit for adjustable-rate over fixed-rate mortgages in the timeframe Greenspan referenced. But that’s mainly because Greenspan shrunk interest rates over the preceding years to 1 percent, their lowest level since the 1950s, creating the resulting rise in mortgage lending. After this 2004 statement, Greenspan belatedly hiked rates from 1 to 5 percent over a two-year span, which opened adjustable-rate mortgage holders to excessive risk.

More important, Greenspan willfully ignored the forces operating under his nose. He knew that brokers were selling not only ARMs, but no-documentation “liar’s loans” and other dodgy products to unsuspecting subprime borrowers. Fed Governor Edward Gramlich gave a speech on the challenges of subprime just three months after Greenspan encouraged everyone to go into adjustable-rate loans. By September of that year, the FBI warned of a mortgage fraud “epidemic,” particularly from this new breed of suspect mortgage brokers. Advisors warned him on multiple occasions to do something about the growing problem, to guard against overall risk and protect consumers from harm.

But instead of tamping down the irrational exuberance in the housing markets, Greenspan encouraged homeowners to seek out precisely the types of products being fraudulently peddled by unscrupulous brokers. This fed the securitization machine and inflated the bubble. At the time, the Federal Reserve had consumer protection responsibilities for mortgages, but Greenspan did absolutely nothing to stop the rotten lending that would eventually implode the housing market. In addition, Greenspan lauded securitization in testimony before the Senate Banking Committee in 2005, saying it “does not create substantial systemic risks.” Only after he left the Fed, in 2008, did Greenspan decide that securitization was the culprit for the crisis. Greenspan pursued no regulatory avenues to deflate the bubble, nor did he bother to speak publicly about the dangers. Like a good Ayn Rand acolyte, Greenspan simply believed that lending institutions would act in their self-interest and never engage in destructive behavior. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” Greenspan admitted to a House panel in 2008. That mea culpa was short-lived; he returns in his new book to an antipathy for regulation and a belief in the righteousness of the free market.

The consequences of Greenspan’s cheerleading were arguably far more damaging than anything JPMorgan Chase did. Greenspan had the ear of politicians and the average Joe, Wall Street and Main Street. He could move markets with a well-chosen phrase. When he endorsed adjustable-rate mortgages, his blessing meant more than a JPMorgan prospectus or even a seal of approval from a credit rating agency. He was essentially blessing the housing market itself, the whole nutty business of runaway price appreciation and house flippers and endless refinancings. He implicitly told investors and prospective homeowners that it was perfectly safe to buy into that market. He put the Greenspan seal of approval on a go-go housing industry that many informed observers could see was headed for a total disaster.

Yet in a case of collective amnesia, this week Alan Greenspan strolls not into a courtroom, but in front of television cameras, to the adoring delight of the establishment. His conduct in the run-up to the financial crisis should at the least lead to some serious reassessments about his legacy. But more than that, as a primary actor in the crisis—someone as responsible as any single person for the carnage—he really ought to pay a price. We don’t send our bad actors to jail anymore in America, at least not if they’re elites. But we can at least send Alan Greenspan an invoice.

David Dayen is a contributing writer at Salon.