by Matt Taibbi
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Greenspan’s response to the horrific collapse of the tech bubble in 2000–2001 was characteristic and predictable. More than $5 trillion worth of wealth had been destroyed in worthless tech stocks, but instead of letting investors feel the pain they deserved, Greenspan did what he had always done: he flooded the market with money all over again and inflated a new bubble. Only this was the biggest “Greenspan put” of all: in the wake of the tech bubble he cut rates eleven consecutive times, all the way down to 1 percent, an all-time low, and began talking out loud about housing and mortgages as the new hot table in the casino.
“When the real estate bubble came along as a consequence of the money printing that was used to sort of drink ourselves sober after the equity bubble, I knew it was going to be an even bigger disaster,” says Fleckenstein.
Looking back now at the early years in the 2000s, Greenspan’s comments almost seem like the ravings of a madman. The nation’s top financial official began openly encouraging citizens to use the equity in their homes as an ATM. “Low rates have also encouraged households to take on larger mortgages when refinancing their homes,” he said. “Drawing on home equity in this manner is a significant source of funding for consumption and home modernization.”
But he went really crazy in 2004, when he told America that adjustable-rate mortgages were a good product and safer, fixed-rate mortgages were unattractive. He said the following in a speech to the Credit Union National Association Governmental Affairs Conference in February 2004:
Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward …
American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.
The most revolting thing about Greenspan’s decision to wave a flag for adjustable-rate mortgages was the timing.
Greenspan was nearing the end of his reign as Fed chief. He would be renominated one more time by George W. Bush, but his last term would end in January 2006.
So the timing of that speech to the Credit Union National Association Conference in February 2004 is remarkable. He had been cutting rates or holding them flat for years. The economy at the time was full of easy money and people everywhere were borrowing fortunes and buying beyond their means. Greenspan himself knew he was on his way out soon, but he also knew one other thing: he was about to start raising interest rates.
In fact, in June 2004, just a few months after he encouraged Americans to shun fixed-rate mortgages for adjustable-rate mortgages, Greenspan raised rates for what would be the first of seventeen consecutive times. He would raise rates at every FOMC meeting between June 2004 and the time he left office two years later, more than quadrupling interest rates, moving them from 1 percent to 4.5 percent. In other words, he first herded people into these risky mortgage deals and then, seemingly as a gift to the banks on his way out of town, spent two straight years jacking up rates to fatten the payments homeowners had to make to their lenders.
“He made that argument [about adjustable-rate mortgages] right before he started raising interest rates. Are you kidding me?” said one hedge fund manager. “All he was doing was screwing the American consumer to help the banks … If you had had people on thirty-year fixed mortgages, you wouldn’t have had half these houses blowing up, because mortgages would have remained steady. Instead … it was the most disingenuous comment I’ve ever heard from a government official.”
Greenspan’s frantic deregulation of the financial markets in the late nineties had led directly to the housing bubble; in particular, the deregulation of the derivatives market had allowed Wall Street to create a vast infrastructure for chopping up mortgage debt, disguising bad loans as AAA-rated investments, and selling the whole mess off on a secondary market as securities. Once Wall Street perfected this mechanism, it was suddenly able to create hundreds of billions of dollars in crap mortgages and sell them off to unsuspecting pension funds, insurance companies, unions, and other suckers as grade-A investments, as I’ll detail in the next chapter.
The amount of new lending was mind-boggling: between 2003 and 2005, outstanding mortgage debt in America grew by $3.7 trillion, which was roughly equal to the entire value of all American real estate in the year 1990 ($3.8 trillion). In other words, Americans in just two years had borrowed the equivalent of two hundred years’ worth of savings.
Any sane person would have looked at these numbers and concluded that something was terribly wrong (and some, like Greenspan’s predecessor Paul Volcker, did exactly that, sounding dire warnings about all that debt), but Greenspan refused to admit there was a problem. Instead, incredibly, he dusted off the same old “new era” excuse, claiming that advances in technology and financial innovation had allowed Wall Street to rewrite the laws of nature again:
Technological advances have resulted in increased efficiency and scale within the financial services industry … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers.
The kinds of technological advances Greenspan was talking about were actually fraud schemes. In one sense he was right: prior to the 2000s, the technology did not exist to make a jobless immigrant with no documentation and no savings into an AAA-rated mortgage risk. But now, thanks to “technological advances,” it was suddenly possible to lend trillions of dollars to millions of previously unsuitable borrowers! This was Greenspan’s explanation for the seemingly inexplicable surge in new home buying.
The results of all these policies would be catastrophic, of course, as the collapse of the real estate market in 2007–8 would wipe out roughly 40 percent of the world’s wealth, while Greenspan’s frantic printing of trillions of new dollars after the collapse of the tech boom would critically devalue the dollar. In fact, from 2001 to 2006, the dollar would lose 24 percent of its value versus the foreign currencies in the dollar index and 28 percent of its value versus the Canadian dollar. Even tin-pot third world currencies like the ruble and the peso gained against the dollar during this time. And yet Greenspan insisted at the end of this period that the devaluation of the dollar was not really a problem—so long as you didn’t travel abroad!
So long as the dollar weakness does not create inflation … then I think it’s a market phenomenon, which aside from those who travel the world, has no real fundamental consequences.
No real fundamental consequences? For Greenspan to say such a thing proved he was either utterly insane or completely dishonest, since even the world’s most stoned college student understands that a weak dollar radically affects real wealth across the board: we buy foreign oil in dollars, and since energy costs affect the price of just about everything, being able to buy less and less oil with a dollar as time goes on makes the whole country that much poorer. It’s hard to overstate how utterly mad it is for a Fed chairman in the age of the global economy to claim that a weak currency only affects tourists. It’s a little bit like saying a forest fire only really sucks if you’re a woodpecker.
In any case, by the time Greenspan left the Fed in 2006, Americans had lost trillions upon trillions of dollars in two gigantic bubble scams, and we had gone from being a nation with incredible stored wealth in personal savings to being a country that collectively is now way over its head in hock, with no way out in sight. As of this writing, America’s international debt is somewhere in the region of $115 trillion, with our debt now well over 50 percent of GDP. This is debt on a level never before seen in a modern industrialized country.
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It sounds facile to pin this all on one guy, but Greenspan was the crucial enabler of the bad ideas and greed of others. He blew up one bubble and then, when the first one burst, he printed money to inflate the next one. That was the difference between the tech and the housing disasters. In the tech bubble, America lost its own savings. In the housing bubble, we borrowed the shirts we ended up losing, leaving us in a hole twice as deep.
It’s important to note that throughout this entire time, while Greenspan was printing trillions of dollars and manipulating the economy to an elaborate degree, he was almost completely unaccountable to voters. Except for the right of an elected president to nominate the Fed chief, voters have no real say over what the Fed does. Citizens do not even get to see transcripts of FOMC meetings in real time; we’re only now finding out what Greenspan was saying during the nineties. And despite repeated attempts to pry open the Fed’s books, Congress as of this writing has been unsuccessful in doing so and still has no idea how much money the Fed has lent out at the discount window and to whom.
Congress’s authority over the Fed is so slight that when Los Angeles congressman Brad Sherman passed an amendment capping the amount of emergency assistance to banks the Fed could loan out at a still-monstrous $4 trillion, it was considered a big victory.
“We were lucky to get that,” Sherman says.
Really the only time the public could even get an audience with Greenspan was through his compulsory appearances before Congress, which Greenspan plainly loathed and for which he set strict time limits. Texas congressman Ron Paul explains that Greenspan was so tight with his time that members of Congress would have to wait in line for months just to get this or that question before His Highness in committee hearings.
“He might come at ten a.m. and say his limit was one or two [congressmen],” Paul says now. “So if you were at the bottom of the list, you wouldn’t get a chance to ask the question.”
As a result, Paul says, members who didn’t get questions in would have to wait months until their next shot. “If you didn’t get to ask your question, you’d be high on the list the next time,” he says. “That was the best you could hope for.”
All of which makes Greenspan’s exit from power that much harder to swallow. He was unrepentant almost to the bitter end. Even as late as November 2007, with the international financial community already beginning to erupt in panic thanks to the latest bubble explosion, Greenspan shrugged. “I have no particular regrets,” he told audiences in Norway. “The housing bubble is not a reflection of what we did.”
It wasn’t until October 2008, after the collapses of Bear Stearns and Lehman Brothers and AIG, after massive federal bailouts were implemented to stave off total panic, that Greenspan budged—sort of. In testimony before Henry Waxman’s Committee on Oversight and Government Reform, he admitted, sort of, that his Randian faith in the eternal efficacy of self-regulating markets had been off, a little.
“I’ve found a flaw,” he told Waxman. “I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”
Waxman at that instant found himself in an unusual position, representing a whole generation of infuriated Greenspan critics and opponents who had never gotten the Maestro to apologize for a damn thing. It would have been understandable had he been overwhelmed by the pressure of the moment. Instead Waxman calmly pressed Greenspan.
“Were you wrong?”
Greenspan’s answer to this question was priceless—a landmark moment in the annals of political narcissism, the Bobby Thomson walk-off homer of unrepentant dickdom. Was he wrong?
“Partially,” Greenspan answered.
That moment is what passes for a major victory for American democracy these days—an elected official getting at least one semi-straight answer out of an unaccountable financial bureaucrat.
But that’s about as good as it gets. In reality, even if Greenspan got taken down a fraction of an inch toward the end of his life, his belief system—or what passes for his belief system—remains ascendant, if not dominant, in the international finance culture. He raised a generation of Wall Street bankers who under his tutelage molded themselves in the image of Randian supermen, pursuing the mantra of personal profit with pure religious zeal.
In fact, what made the bubbles possible was that the people who ran banks like Goldman Sachs and Morgan Stanley and Citigroup during the Greenspan era were possessed by this cultist fervor, making them genuinely blind to the destructive social consequences of their actions and infuriatingly immune to self-doubt. The Randian mindset was so widespread in the finance world that even after the horrific 2008 crash, executives from Goldman Sachs could be seen insisting in public that Jesus himself would have approved of their devotion to personal profit (“The injunction of Jesus to love others as ourselves is an endorsement of self-interest,” Goldman international adviser Brian Griffiths told parishioners of London’s St. Paul’s Cathedral). That sort of moral blindness turbocharged the greed on the private banking side, but it was Greenspan’s cynical construction of a vast and unaccountable welfare state that made the theft scheme virtually unstoppable.
The important thing to remember about the Alan Greenspan era is that despite all the numbers and the inside-baseball jargon about rates and loans and forecasts, his is not a story about economics. The Greenspan era instead is a crime story. Like drug dealing and gambling and Ponzi schemes, bubbles of the sort he oversaw are rigged games with preordained losers and inherently corrupting psychological consequences. You play, you get beat, in more ways than one.
Greenspan staked the scam, printing trillions upon trillions of dollars to goad Americans into playing a series of games they were doomed from the start to lose to the dealer. In the end the printed wealth all disappeared and only the debts remained. He probably did this just because he wanted to see his face on magazine covers and be popular at certain Upper East Side cocktail parties. His private hang-ups in this way shaped the entire scam of modern American politics: a pure free market for the suckers, golden parachutes for the Atlases.
*Note the name-dropping at the start of this quote, a literary habit that through the years has infected Greenspan’s writings and speeches like the world’s most persistent case of herpes. His autobiography, The Age of Turbulence, features numerous passages in which his lists of dropped names ramble on with feverish, almost Gogolian intensity. Take for instance this one, in which he talks of the fiftieth birthday party his girlfriend Barbara Walters threw for him: “The guests were the people I’d come to think of as my New York friends: Henry and Nancy Kissinger, Oscar and Annette de la Renta, Felix and Liz Rohatyn, Brooke Astor (I knew her as a kid of seventy-five), Joe and Estée Lauder, Henry and Louise Grunwald, ‘Punch’ and Carol Sulzberger, and David Rockefeller.” Needless to say, when the Federal Reserve Act was passed in 1913, Congress was probably not imagining that America would ultimately hire a central banker who dated anchorwomen and bragged about hanging out with Oscar de la Renta. Greenspan has always appeared constitutionally incapable of not letting people know who his friends are—it’s always seemed to be a matter of tremendous importance to him—which is why it’s absolutely reasonable to wonder if maybe that was a reason his Fed policies were so much more popular with the Hamptons set than those of a notoriously shabby recluse like Paul Volcker.
*It’s a heavy subject even in the literal sense. One of the definitive works on the Fed, William Greider’s Secrets of the Temple, is such a legendarily dense and physically massive book that a group of editors I know jokingly dared one another to try to shoplift it.
*“I would not only reappoint Mr. Greenspan; if Mr. Greenspan should happen to die, God forbid … I would prop him up and put a pair of dark glasses on him.”—then–presidential candidate John McCain, 2000.
3
Hot Potato
The Great American Mortgage Scam
THE GRIFT IN America always starts out with a little hum on the airwaves, some kind of dryly
impersonal appeal broadcast over the skies from a high tower, an offer to sell something—help, advice, a new way of life, a friend at a time of need, the girl of your dreams. This is the way the ordinary American participates in this democracy: he buys. Most of us don’t vote more than once every four years, but we buy stuff every day. And every one of those choices registers somewhere, high up above, in the brain of the American Leviathan.
Back in early 2005 a burly six-foot seven-inch black sheriff’s deputy named Eljon Williams was listening to the radio on the way home from his nightmare job wrestling with Boston-area criminals at the city’s notorious South Bay House of Correction. The station was WILD, Boston’s black talk-radio station, which at the time featured broadcasts by Al Sharpton and the Two Live Stews sports radio show. While driving Williams heard an interview with a man named Solomon Edwards,* a self-described mortgage expert, who came on the air to educate the listening public about a variety of scams that had been used of late to target minority homebuyers.
Williams listened closely. He had some questions about the mortgage he held on his own three-decker home in Dorchester, a tough section of Boston. Williams rented out the first and third floors of his house and lived in the middle with his wife and his son, but he was thinking of moving out and buying a new home. He wondered if he should maybe get some advice before he made the move. He listened to the end of the broadcast, jotted down Edwards’s number, and later gave him a call.
He made an appointment with Edwards and went to meet him. “Nice young black man, classy, well-dressed,” Williams recalls now. “He was the kind of guy I would have hung out with, could have been friends with.”
