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Greenspan: Fed Didn’t Cause the Housing Bubble

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Reuters
Wednesday, March 11, 2009

Former U.S. Federal Reserve Chairman Alan Greenspan said lower rates on long-term, fixed-rate mortgages and not the Federal Reserve’s policies are to blame for the U.S. housing bubble.

“Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate,” Greenspan wrote in the Wall Street Journal.

Calling his explanation of the causes far more credible than blaming ‘easy money’ policies, Greenspan wrote that “it was indeed lower interest rates that spawned the speculative euphoria.

Greenspan: Fed Didnt Cause the Housing Bubble obamadecept 340x169

However, the interest rate that mattered was not the federal-funds rate,” adding that U.S. mortgage rates’ linkage to short-term rates had been close for decades.

The Federal Reserve became aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004, said Greenspan, who was the Federal Reserve Chairman from 1987 to 2006.

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This article was posted: Wednesday, March 11, 2009 at 5:02 am





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