Pop Goes the Weasel

POP GOES THE WEASEL….The collapse of the home mortgage market, especially among subprime lenders who (until recently) have been eagerly offering risky variable-rate mortgages to questionable applicants, prompts a plea from Reed Hundt: “Help me, readers, find that quote where Dr. Greenspan recommended that everyone take more risks in the mortgages they assumed.”

Ask and ye shall receive. Here it is, in a February 2004 address to a conference of credit union executives:

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….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.

Oops. But the bigger question is, why did Greenspan make such an odd pronouncement? It’s not as if he wasn’t aware of the dangers of irrationally exuberant bubbles driven by over-optimistic lending practices.

Ben Wallace-Wells provided the likely answer in “There Goes the Neighborhood,” in our April 2004 edition. Writing at the height of the refi boom, he put it this way: “Quite simply, Greenspan is trying to keep a wobbly and fragile recovery alive — and using mortgage refinancing to do it.” In other words, he was desperate and didn’t have any other choice. Read the whole thing for a prescient look at the home mortgage market and what happens when bubble-icious financing schemes finally come crashing down.

For more, check out the New York Times here and the LA Times here. It ain’t pretty.

UPDATE: Here’s an even better Greenspan quote from April 2005. Inexplicably, a year’s reflection apparently made him even more bullish on subprime lending.

Support Nonprofit Journalism

If you enjoyed this article, consider making a donation to help us produce more like it. The Washington Monthly was founded in 1969 to tell the stories of how government really works—and how to make it work better. Fifty years later, the need for incisive analysis and new, progressive policy ideas is clearer than ever. As a nonprofit, we rely on support from readers like you.

Yes, I’ll make a donation