Alan Greenspan was wrong
By Chris ClairFrom an opinion piece in Thursday’s Financial Times:
“Indeed, any lender would have been encouraged by his words in April 2005: ‘Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending.’ Well, he was right about the rapid growth in subprime lending.”
One theory holds that nobody could have foreseen the credit troubles we’ve been dealing with for the past year, not even that great seer Alan Greenspan. Except that some people did, including some people not even in the finance industry. Here’s author and urban critic James Howard Kunstler writing on May 23, 2005:
“The wealth accumulated in the US in the second half of the last century is actually shrinking now, since our industrial base is withering away, and whatever investment we are capable of making has been increasingly directed into the “hard assets” of houses. The catch is that the “investment” in houses is almost all credit — mortgages, promises to pay most of the money later. The catch of the catch is that the cost of obtaining credit (interest rates) remains supernaturally low and the standards for creditworthiness have ceased to exist. The catch of the catch of the catch is that a lot of the mortgages are adjustable, meaning the cost of borrowing doesn’t necessarily stay supernaturally low. It can float with rising interest rates. Finance professionals know that these conditions are perverse and perilous.”
