Alan Greenspan: Waged war of attrition on America’s middle class
In 1997, I bought my first home. It was a modest 1,000 square foot early ’70s ranch home with a one-car garage in suburban Saint Louis, and it cost me about $92,000.
In the spring of 2006, it appraised for $185,000.
The value of our home didn’t change during those nine years. It was a cozy place to raise our daughter, conveniently located with regard to work, shopping, our bank, and major highways. While I kept the house in good shape, I didn’t invest anywhere near $90k in upgrades. There were no changes in the job market that increased demand for houses in our neighborhood. And we sure didn’t find oil or precious metals in the garden.
So why did two of the largest mortgage bankers in America tell us our house had doubled in value in less than ten years?
Alan Greenspan, chairman of the Federal Reserve Bank from 1987 to 2006, began inflating the housing bubble — as he now admits — by kicking off a “decline in real long-term interest rates” that reached its zenith in 2002 when the Fed dropped the federal funds rate to 1.0%.
Even then, Sir Alan (and why did Queen Elizabeth knight him, anyway?) knew what would come from this absurdly low interest rate:
“Besides sustaining the demand for new construction, mortgage markets have also been a powerful stabilizing force over the past two years of economic distress by facilitating the extraction of some of the equity that homeowners have built up over the years.”
Now, even first-year econ students learn the basic law of supply and demand: The greater the supply of a product, the lower the value. So by dropping the real federal funds rate to a negative number (when inflation is factored), Greenspan increased the supply of money, making dollars less valuable — at least for buying real estate.
Here’s how it works. Say you’re trading pigs for a new house. Over the last few years, the government has aggressively bred pigs and given them away to anybody who wants them. Now, how do you make a deal for pigs when it’s a lot easier to get your hands on a pig today than it was a year ago?
Simple: You offer the other guy more pigs. The house hasn’t changed in value; it’s the pigs that are worth less.
In the same way, the surge in available mortgage dollars pushed real estate prices into a long, steep climb, encouraged along the way by Sir Alan’s recommendation that more homeowners take out adjustable rate mortgages at a time when mortgage rates were near historic lows.
Without trying to explain the tangled web of financial instruments that sprouted from this compost heap of ballooning debt, a labyrinth so complicated that new Fed chairman Ben Bernanke had to sit down with leading investment bankers last fall for a refresher course in Mortgage Backed Securities, it’s enough to say that anyone with common sense knew that the party had to end sometime. And it has, in a couple of ways.
Millions of Americans face mortgage payments they can’t make as the teaser rates on their ARMs end and their payments increase. As they default, the securities traded by investment bankers backed by those mortgages suddenly drop in value. Fewer dollars are made available for mortgage loans, which makes them more valuable; i.e., housing prices drop, leaving many homeowners upside-down — owing more than their houses are worth.
While the fuse on the housing collapse was being lit by Sir Alan, he was simultaneously pushing more and more U.S. dollars into circulation around the world. This, of course, had a similar effect, making imported goods like oil more and more expensive as the dollar’s value sank lower and lower. (Greenspan’s successor, Ben Bernanke, accelerated the process to the point that the Fed quit reporting the official money supply numbers in the spring of 2006.)
The dollar is at record lows against most of the world’s major currencies. While some argue that this helps American exports, the sad fact is that we don’t make much here anymore. And we’ll never see gasoline under $2.00 a gallon again.
So getting around to the point: Why is Alan Greenspan a traitor?
Do you believe that a man who’s widely considered an economic genius really didn’t know that increasing the money supply would devalue the dollar and fuel inflation that’s now running at close to 12%, when calculated with the formula used in 1980? (Think about that for a minute. If your money is in a CD earning 4% interest, you’re actually losing 8% in real buying power every year!)
No, I don’t believe it, either.
And now, Sir Alan is traveling the globe, advising investors like oil-rich sheiks in the Middle East to de-peg their currencies from the dollar to lower inflation in the Gulf states. Did you get that? Alan Greenspan, who created this inflationary mess, is telling investors around the world to dump the dollar because of inflation!
If investors take his advice, it would be like pouring gasoline on the fire. Supply and demand again; investors flood exchanges with unwanted dollars, their value drops — and we in the States, forced to use the devalued paper to buy our imported gasoline and shoes, find our standard of living dropping even faster.
Alan Greenspan set us up for a fall, and now he’s encouraging foreign investors to drive a stake into the heart of the American middle class. He’s proven that his loyalty lies with international bankers and not with his home country. That’s treason.