THE BLAME GAME
September 21, 2007
The blame game has started -- at least for those who charge that former Federal Reserve Board Chairman Alan Greenspan is the cause of the current financial market turmoil, says Bob McTeer, a distinguished fellow with the National Center for Policy Analysis.
The first misconception is that Greenspan pushed interest rates too low, says McTeer:
- Disinflation and falling interest rates were a worldwide phenomenon; to attribute them to Alan Greenspan is parochial in the extreme.
- As the threat of deflation diminished, the Federal Open Market Committee (FOMC) raised its target Fed funds rate in 17 consecutive quarter-point steps over a two-year period.
- During that period of rising short-term rates, long-term rates remained flat or declined worldwide, not just here.
- That "conundrum," as the chairman famously called it, eventually was attributed to the extremely high saving rates of newly emerging economies worldwide.
Another fallacy is that Greenspan lured unsuspecting consumers into adjustable rate mortgages (ARMs) they couldn't afford, says McTeer. In reality, it's unlikely the chairman sent the average home buyer running off to apply for an ARM he couldn't afford. Affordability, says McTeer, is primarily a matter of income.
Finally, the accusation that the Fed was party to a bail out of Long Term Capital Management (LTCM) in 1998 is untrue, says McTeer:
- LTCM's major creditors bailed themselves out in mid-September 1998 by adding good money after bad, leaving the original investors only a few cents on the dollar; it's unlikely they felt bailed out by anybody.
- Further, the three quarter-point easing moves by the fed from Sep. 29 to Nov. 17, 1998 came after the resolution of LTCM by its creditors in mid-September and was motivated by the market impact of the Russian debt default and devaluation on top of the ongoing Asian crisis.
Source: Bob McTeer, "The Blame Game," Washington Times, September 16, 2007.
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