Adjustable Rate Mortgages the Missing Link
What about Greenspan’s argument that he only controlled short-term rates? And that short rates became decoupled from long-term rates in 2002? Nonsense, says [Stanford Professor John] Taylor. Surely the existence of adjustable-rate mortgages (accounting for about one-third of mortgages starting in 2003) linked the mortgage market and short-term rates.
–Susan Lee, “It Really Is All Greenspan’s Fault”; Forbes (4/3/09)
One of the more interesting debates within economics circles is exactly how culpable former Fed Reserve Chairman Alan Greenspan is for the housing bubble. Put me in the camp that says, “very.”
Greenspan has protested — and continues to protest — that as Fed Chairman he was only responsible for setting short-term interest rates.
But thanks to the explosion of adjustable rate mortgages — encouraged by none other than Greenspan himself — dirt-cheap, short-term interest rates quickly spilled over into the housing market.
As a result, Greenspan’s drive to lower rates in the wake of the tech stock bust and the post-9/11 recession directly led to vast, new sums of capital being made available to home buyers.
The rest, as they say, is history.