Robert Penn Warren: “Historical sense and poetic sense should not, in the end, be contradictory, for if poetry is the little myth we make, history is the big myth we live, and in our living, constantly remake.”
One asks, “What has brought us here today?”
Well, unfortunately recently we here at The Placemaking Institute were for some reason regaled by then forced to relay about our Most Senior Fellow harkening watching Alan Greenspan on Capitol Hill in 2000 or 2001[i] assuring US that the housing market could never become one big bubble that bursts because it was like a glass of champagne comprised of tiny little bubbles that upon reaching the top would burst, always to be followed by yet another bubble and yet another and another and so forth; how he subsequently started thinking, “But what happens when the champagne goes flat?”; and how he “waited and waited and, being the dismal economist I can be, waited some more, always expecting each passing year to be the year it happened when, after almost eight years…Kaflooey!” He then went on to observe that while some good straightforward pieces have been written about the so-called Panic of 2008, they tend to lack any historical perspective whatsoever and can be most definitely broadened beyond the past two years to at the very least a decade.[ii]
All in unison, “How so?” The Placemaking Institute wondered.
And that is how we learned come to find out that that Greenspan fellow lowered the Fed Funds Rate (FFR) from 6.5% to 1.0% during 2001-2003, which he argues did not cause the housing bubble. It would be overly simplistic to argue that the Fed’s interest rate manipulations during the early years of this decade caused the housing bubble, and so in a sense he is correct; it would be more appropriate to view the Fed as the “great enabler” of the range of monetary excesses that led to the bubble and subsequent bust. But it is clear that the Fed set and kept its official target rate too low for too long during much of 2001-2005. Such mistakes inevitably occur when you give a person or a group of people too much power.[iii]
“So well before the bubble burst Housing had been an unsustainable mirage of wealth for Americans.”
Exactly. Because in no way should the, if you will, “masses” and/or especially so-called “experts” have construed subprime mortgages to be a safe investment. These ever-risky lending practices led to – or, better, expedited what Minsky termed “Ponzi Borrowing,” which occurs when an entity is unable to pay either the principal or the interest and yet they are able to borrow more and more. This is pretty much the root cause of the recent housing market crash as well as other historically delusional investments like tulips and selling shares of stock for gold mines in Mississippi. All at once together we here at the Placemaking Institute interrupted, “Tulips? Mississippi gold mines? How the heck did banks get away with their subprime mortgaging practices for so long?” Because Greenspan deregulated the industry, which he himself acknowledged to be a mistake: “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.”
According to our Most Senior Fellow, this means that that Greenspan person, although he has most definitely indeed consumed his Ayn “Infallible” Rand, hasn’t read his Adam Smith, who would in no way have been shocked: “[The capitalist class] ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”
“The Federal Reserve had broad authority to prohibit deceptive lending practices under a 1994 law called the Home Owner Equity Protection Act. But it took little action during the long housing boom, and fewer than 1 percent of all mortgages were subjected to restrictions under that law…In 2008 the Fed greatly tightened its restrictions. But by that time, the subprime market as well as the market for other kinds of exotic mortgages had already been wiped out. Mr. Greenspan said that he had publicly warned about the ‘underpricing of risk’ in 2005 but that he had never expected the crisis that began to sweep the entire financial system in 2007.”[iv]
Representative Henry Waxman: “You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. Do you feel that your ideology pushed you to make decisions that you wish you had not made?”
Greenspan: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact…This crisis has turned out to be much broader than anything I could have imagined. It has morphed from one gripped by liquidity restraints to one in which fears of insolvency are now paramount…The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower.”
Then our Most Senior Fellow bloviated forth: “The funny thing is that some people are ignoring all of that so they can continue perpetuating their pet argument about growth management leading to the burst of the housing bubble and, rather than ‘we the people’ learning from our past mistakes, they espouse that we should continue focusing literally upon pushing our society farther along the broken down highway of sprawl. (Eudora Welty: “When you are looking for what is lost, everything is a sign.”) Arguments like these that focus blame upon such adamantly precise minutia indicate an aversion to inconvenient facts and historical precedents and a predilection for promulgating myths that have long legs and slogans that are repeated often and fit on bumper stickers. (Voltaire: “History consists of a series of accumulated imaginative inventions.”) When short-term memory losses such as those they exhibit become un-indictable then so do long-term memory losses; in other words, Generations Sprawl has collectively squandered what once could have made this country pretty nifty, and most economists are asserting that this young generation will fare worse than their parents’ generation, the first time that that has happened in American history. And following sprawl-driven GDP in such manner any longer will only hinder social advancement for generations to come.”
Thomas Jefferson: “No generation can contract debts greater than may be paid during the course of its own existence.”
“Exactly, Tommy, and but alas when the ramifications of oil production peaking then subsequently dwindling are felt? That’s going to be all the growth management that we need because we as a society are going to have no choice but more compact development.”
[i] He is fallible!
[ii] (“And if I had the time,” our Most Senior Fellow side-noted, “I could broaden it to the past sixty some odd years.”)
[iii] Although we are positive the above is a paraphrase of something somebody wrote, our reference has somehow disappeared.