Why is alan greenspan famous

But with house prices rising relentlessly, the homeowner could refinance with another ARM, or pay down some of the mortgage and reduce the monthly payments. A rapidly growing number of these were subprime mortgages, sold to home buyers with poor credit. But middle-income Americans also often took ARMs, to buy homes once out of their reach.

With rates so low and no federal oversight, mortgage lending practices, long suspect, became widely abusive. Greenspan knew about these loans, and was warned by associates at the Federal Reserve that abuses were mounting.

He had the authority to investigate but chose not to. In , remarkably, Greenspan himself spoke favorably of the ARMs.

At last, the economy started to grow strongly again, based on the housing boom, and Greenspan began to raise the federal funds rate in mid, eventually by more than 4 percentage points. The rising federal funds rate, which reached 5. Packaging mortgages into securities—securitization—had made such institutional investors as pension funds and insurance companies the major providers of funding for mortgages.

Hundreds of billions of dollars of new money found its way to homeowners each year. When Greenspan raised rates, it did not staunch this flow because mortgage brokers, which now included giant mortgage specialists like Countrywide Financial, big commercial banks like JPMorgan and Citigroup, and the major Wall Street investment banks, like Lehman Brothers , pushed ever harder to sell the ARMs with the low initial rates or mortgages known as Alt-A that required no verification of income.

They knew that Wall Street had an almost bottomless pit of demand for the new securitized debt from pension and investment managers as well as financial institutions around the world. Greenspan just could not get long-term interest rates to rise much. Greenspan, based on his firm market principles, approved strongly of securitization and most derivative products as a way to spread risk— a view traditional market economists like Summers shared.

But even when crisis struck in , it was clear the Federal Reserve economists in Washington and New York did not understand how excessive and risky the borrowing now was. Informed investors could expect the Fed to take predictable actions that would bailout investor's losses, which distort the incentives of market participants.

This created an environment where investors were encouraged to take excessive risk because Fed monetary policy tended to inherently limit their potential losses in the event of a market downturn in an analogous way to buying put options on the open market.

Bernanke served until Like many other government officials, the success of Alan Greenspan's five terms as Chairman of the Fed will depend on who you ask. However, it is certainly true that Greenspan faced some massive challenges during his tenure, such as the stock market crash and the attacks on the World Trade Center.

Overall, Greenspan helped usher in a strong U. Opinion on how much his actions caused the economic recession that began shortly after his term ended varies. Federal Reserve History. Alan Greenspan. New American Library, Federal Reserve Board. Federal Reserve Economic Data. Mario Rojas Miranda. The Economic Journal, Volume , Issue , Federal Reserve. Monetary Policy. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. But he focused instead on inflation for a simple and not entirely good reason. Controlling asset prices and leverage was hard; fighting inflation was easier. Both of these contentions are, well, contentious, and this book does not add much to long-running debates. For example, as Mallaby discusses, Greenspan was frustrated by the lack of Congressional response to his early and frequent warnings about the government-sponsored enterprises, Fannie Mae and Freddie Mac.

Supported by both banks and the housing industry, and with huge profits available to use to advance their political goals, the GSEs were basically untouchable in the years before their shocking demise in However, although the political forces blocking GSE reform were indeed powerful, there were other ways in which a counterfactual Greenspan—one convinced that tougher financial regulation was necessary—might have had a meaningful effect.

Second, more concretely, during this period the Fed already had in hand regulatory authorities in banking supervision and consumer protection. There is implicit self-criticism here, since I was on the Board of Governors from late to early To be sure, as I discuss in chapter 5 of my memoir, The Courage to Act , these authorities were not immune to political influences.

Moreover, regulatory fragmentation posed practical challenges, e. With the very substantial benefit of hindsight, these tools could probably have been used more aggressively to tackle not only bad mortgage lending but also risky banking practices, like the proliferation of off-balance sheet vehicles and poor liquidity management. In short, it would have been asking a lot of Greenspan—given his own inclinations and the prevailing intellectual winds—to have taken a more proactive regulatory stance in the years before the crisis.

On monetary policy: This is not the place to re-litigate the long-running debate on whether, in setting short-term interest rates, central banks should give heavy weight to financial stability concerns.

I discussed monetary policy and the housing bubble here ; see also this blog post and chapter 5 of my memoir. The view held by most policymakers today, which I believe to be correct, is that under most circumstances, monetary policy is too blunt a tool to use for controlling asset bubbles; consequently, it should not be used in that way if at all until more-targeted regulatory and supervisory approaches have been exhausted.

However, quantitative cost-benefit analyses of the potential use of monetary policy to tackle asset bubbles have tended to find that the cost the direct effect of higher rates on employment and inflation greatly exceeds the putative benefits a possible reduction in the risk of a crisis ; see, for example, recent work by Andrea Ajello et al. In the Fed was navigating a deflation scare and a jobless recovery from the recession—no net payroll jobs were created in the U.

As Brad DeLong has pointed out , citing the FOMC transcript, at that point Greenspan was far from certain that the rise in housing prices was a nationwide bubble or that it could pose a threat to financial stability. Indeed, much of the increase in housing prices was still to come: According to the Case-Shiller city index, house prices, which had risen 12 percent in , would rise an additional 16 percent in and 15 percent in before peaking in early The FOMC would go on to raise the federal funds rate at seventeen consecutive meetings.

The firm provides strategic and economic advice to investment banks, hedge funds, government agencies and other financial institutions. The firm boasts the accomplishment of accurately forecasting and predicting the economic downturn of Greenspan has been advising, guiding and influencing minds on complex economic issues, and providing beneficial and market friendly strategies.

He is accredited for the accomplishment of orchestrating the longest official economic expansion in the history of United States, which lasted from to