Dear Alan Greenspan:
Sigh. This is my second letter to you. Much like Santa Claus when I asked for magic mushrooms and Mayor Fenty when I requested the streets be plowed after snowstorms, you did not answer my first letter. I’m not hopeful you will answer this one either.
I know you are very busy with your retirement, alternating between sipping your Mai Tai and making blanket idiotic statements that get picked up by the media, but really, stop. You are no longer the Chairman of the Federal Reserve, so what you say doesn’t matter. Well, I would like to think it doesn’t matter. Unfortunately, stupid people hang on your every word, believing it to be it to be gospel. If you predict a housing market crash, it will surely happen because people “believe” it will happen, and they react as such, creating the very market conditions you warned of, and then you have mayhem.
Frankly, the fact that you even speak at all is so totally unfathomable to me. You created this mess we’re all living out right now. You consistently reduced the Federal Funds rate which, through a whole series of economic events, affected the Bond Market in turn lowering mortgage rates. I know, you were just trying to make sure our economy didn’t tank after September 11th. Understandable. Respectable. But, going from 3% to 1% by June 25, 2003, and leaving it there for a full year? At how many dozens of Fed Meetings did you fuck with the rate? Too many.
See, again, we have this guiding principle about the U.S. Economy: It is self-correcting. It doesn’t need a whole lot of help. Here is where I would draw for you, a supply and demand diagram with the Price and Quantity coordinates. We’d compare guns to butter, or I would dumb it down for you to houses and prices, and explain that when you make money cheaper to borrow, you suddenly put more people in the market to buy a house because they think they can finally afford the American Dream. Too much money chasing too few goods and services makes prices increase. Inflation. Remember? You entice people in the market who don’t want to be there yet, robbing future demand. You also lure speculators (a.k.a. investors, scumballs) into the market. People saw the housing industry like they did bootlegging, day trading and junk bonds – a place to make quick and easy cash. Except everyone viewed housing to contain very little risk because they were speculating on something with an underlying asset – the actual home in which someone can live. This is “artificial demand.” People aren’t there because they need the house, they are in the market because you have made the house easier (read: cheaper) to get and instead of living there, they are purchasing it with other plans in mind.
If you are following along on our x-y axis, you will see that you have more demand, and then supply goes down. Then, prices go up to meet that demand. As we all know, home prices went up. And up. And up. You lowered the Federal Funds rate to an unprecendented 1% and kept it there for over a year. Why? My only explanation is because you are a fucking idiot. The other explanation is senility but I prefer the “fucking idiot” scenario.
Now, let’s look at what happened out here in the real world, away from the corner offices, leather chairs and ivory backscratchers of your world.
Holly and Harry Homeowner went to buy a house. They stretched and saved, and ended up still not being able to finance a home because prices had slipped just beyond their reach. But they believed everyone who said they should go buy a house and they would make a killing when they sold it. So along comes the lender with “creative financing” and sold them some “no money down / no doc” loan they call an ARM, where the rate adjusts. Irony lives and dies in the fact that they call it an arm, because once the rate changes it costs you an arm and the proverbial leg to get out of the mess you’ve created. So the prices start going down on homes, people start foreclosing on loans, and you have things like this happening.
Again, I would like to remind you: self-correcting economy. Your intent in keeping the economy afloat was a wise foresight on your part. But, you should have stopped with the rate reductions at some point earlier than 2003. You should have also increased the rates at a much faster pace than you did. Since you are so good at shooting your mouth off, you should have also warned all those homebuyers: If they can’t afford a fixed rate mortgage, then they can’t afford that particular house. Of course, you didn’t though. You’re saying it now, but back then, you were happy that the homebuilding industry was keeping the economy afloat and that you looked like a hero. You can’t give stupid people a bunch of money and not advise them of some basic financial rules because everyone else has to suffer the fallout when those people mismanage their money. I say it at work all the time: You can’t walk into a room and say “This is fucked up, fix it,” but not guide people in exactly HOW to fix it. If they knew, it wouldn’t be fucked up in the first place, right?
Read this if you want to vomit along with me. (“High housing prices are more of a problem than loans” – whose fault is that now? Asshole.)
No love for you,
Velvet
P.S. Putting names and faces to all this foreclosure does nothing for me. I’ve been reading these articles for weeks now. I don’t feel sorry for these people. They are idiots. Just because someone hands you really cheap money, doesn’t mean you should take it. Again, if you can’t afford a fixed rate mortgage, YOU CAN’T AFFORD THAT HOUSE. It was the buyer’s responsibility to determine that their job as the Assistant Manager at CVS wasn’t going to have a 30% pay increase occur at the same time the “adjustable” portion of their mortgage kicked in. Before one makes a multi-hundred thousand dollar purchase, they need to get some financial advice from someone other than their loan officer who has a vested interested in closing their loan and making a commission. Someone who will tell them, to their face, that they cannot afford this particular home.
Swoon–I love you so much when you talk about the housing market. 🙂 Seriously, my office has been all abuzz over these problems, too–let’s just say it’s an eeeenteresting time to work in the mortgage biz.
my beautiful friend: I’m glazed over in lost world, maybe it’s because I will never ever ever make enough money to own anything considered “property” but that was so much high intelligence email I feel I should read Roosh to dumb myself down. but I always fully support anything you hate. Just tell me where to send the hate mail!
Love always,
At the Bottom of her Drink
what 6s & 7s said.
Ok let me say that I don’t own a home. I probably could if I wanted to but I will be damned to live in the suburbs where I COULD afford.
Which brings me to. WHY OH WHY do people feel that it is their god given right to buy buy buy and the more SUVs and houses with yards and brats to send to pre school makes you a BETTER PERSON or a BETTER AMERICAN? THey are all up to their necks in debt so far they will never get out.
So now their kids can’t get loans to go to college, they have to live at home and go to community college and then they rack up their own credit card debt while they work at Blockbuster. What happens when dad’s company steals his pension and when mom has to go to rehab or runs away with the neighbor? How much do you give a shit about your pool? flat screen TV? volvo convertible?
WHY OH WHY you dumb, fat Americans, do you think that OWNING things makes YOU worth something. It doesn’t make you anything but greedy pigs!!! it makes you in debt. SO rock on Velvet to say that if you can’t afford that house, you can’t have it. Just like I can’t afford those manolos…and wearing steve madden doesn’t make me less of anything, but OUT OF DEBT.
I’m lovin the bigger bitch right now. Loving.
People keep asking me why I still rent, despite the fact that I’ve been saying I need to buy for the past five years. Ultimately, it’s because paying half a million dollars for a teensy-tiny little condo — or a small house in the far-off unfun suburbs — just isn’t cool. So, now that I read this, I can blame Alan Greenspan with impugnity, and keep repeating my new mantra: “But at least I own my car.”
Apropos of nothing, why is everyhing bold?
Did I fix it? Stupid html code.
Looks good to me. Did someone forget to close their tag?
Grasshopper, Chinese have old proverd, “may you live in interesting times… when you sign a contract for three year interest only ARM with no money down and lender stacks another $3,000 of fee’s on top of your loan for advising such wise course so they can buy their next BMW Z3.”
Of course, we know how wrong the chinese are. So, in addition to getting an interest only ARM, I told the lender to lie on the application so I could get a reverse mortgage. SCORE!!!!!
Gulp…. yeah, I’ve that that horrid ARM you speak of and it’s up at the end of the year. I’m hoping that by some miracle I can readjust to a fixed loan or I may be one of the doomed.
I totally, totally agree with the Bigger Bitch and with Velvet’s scolding of Alan Greenspan. The – I can say it- Ex was on the hunt for a house for a year and I became an expert on all “housing” things and down in F**g Florida, where you can imagine how it was. Lesson learned: I love, love my NY apartment and I’m so happy I’m still away from having to buy anything at all. Yuck.
“Frankly, the fact that you even speak at all is so totally unfathomable to me.”
Love it! 🙂
It’s interesting, because some people seem to be winning the housing market game (I met one of these unique individuals this week), but they’re playing the game much smarter than Joe average (by not getting into ARMs, for one thing)
And probably, like yourself, not putting much faith (if any) into the Green-speak either.
1) Amen.
2) My sister falls into the “dumb as shit” category. I’m just waiting for her to figure out that teachers’ salaries (yes, they should be paid waaaay more for the crapola they deal with) do NOT buy $525,000 houses. God only know what the hell kind of financing they got, but they are having a hard time turning it into a “real”/fixed rate mortgage.
BJ – It will be interesting to see what happens. Though not incredibly interesting to see house prices across the board fall. We’re pretty safe here in D.C., because there is so much demand for housing. But the Midwest, California, Florida, Arizona, and what’s left of the Vegas market that hasn’t already crashed will be hard hit.
Sixes and Sevens – I will always have room for you. Don’t worry. Sherlock and I will take care of you as though you are our little child.
Carrie M – You too then!
Bigger Bitch Than You – I hear what you are saying. I’m not part of the all-consuming American generations. I feel my roots very very deeply. SUV’s and flat screens are not my thing. Money in the bank is my thing.
Dara – Yes! Blame him!! He did all of us a huge disservice. Keep renting and save your money for when the time is right. 20,000 condos are going to hit the market in the metro area in the next two years. And not all of those condos will have full price buyers. Save that cash!
I 66 – I’m not sure what happened there. That was weird.
Elvis – Oh my god Reverse Mortgage is such a scam they are pulling on the elderly. “Gee, you’re gonna die soon, let’s slowly buy your house back and hope that you die right as we make that last payment!”
Bejeweled – REFI RIGHT NOW!!!!! Refinance to a 30 year fixed, seriously. Rates are only going to go up. Call your lender, try to lock tomorrow.
NSLW – One really gets ass-fucked in Florida, because even if you can afford the payment, you can’t afford the Homeowner’s insurance.
Anon – HA! Thank you!! I do wish that little wrinkled prune would stop talking already. He’s caused such a mess.
Houses can be liabilities– I think that people forget that. Good post, Ms. Responsible.
Yeah, right on. Some places like Vegas, where half the new jobs created were in the home builiding industry, will be hit really, really hard.
Also, the chinese are sick of lending us money to do stupid things (like fight pointless wars or give subsidies to our farmers to not plant crops) so they are going to stop buying US Government bonds. When they leave the market it will send mortgage prices really high (it was in the high double digits in the 80s).
Great post!
Don’t know if you read that erudite publication “US Today”, but if you do, you’ll see that your friend is starring on the front page of the business section. And it contains the answer to the ‘why do you speak at all” question: “Greenspan’s speaking fee is confidential. However, three people who have booked the former Fed chairman said that he charges more than $100,000 per speach. Given that he’s been averaging one speech a week, his income from e speeches alone likely exceeded $5 million in his first year of the private sector.”
They also quote Mike Ferrari, director of merchandising from Barnes & Noble, who says that he expects Greenspan’s new book (scheduled for release Sept 17: “The Age of Turbulence: Adventures in a New World”) to “be a best-seller for sure.” 🙂
But you will be happy to know that the the article concludes with Northern Trust chief economist Paul Kasriel saying “He’s going to have a reasonably short shelf life.”
Amen, Velvet! BTW, Bigger Bitch Rocks.
Velvet my weirdly fiscally responsible friend, Florida housing market is a mess because, like LA, everybody is working two jobs while they work on their next project. I love getting calls from “chief information officers” in South Florida because there is no tech sector in Miami. I know SEC attorney’s down there who say fraud for tech venture capital is rampant. Issue number two, Houses are liabilities if people have no idea what they are doing. It’s a wonder these people get together with their money in the first place (from adage, a fool and his money are …). Vegas should be renamed, “the Incredibly disappearing RE market.” I’ve always said that real wealth can be created in the RE market, but you have to know what you’re doing (a year and a half ago, I almost bought a 10-unit apartment building, but the cash-flow analysis was … not compelling).
Elvis…just you wait for my next unveiling. I’m defining “fiscally responsible” left and right over here! I’m such a geek. Finance Major. What can I say?
Anon at number 18 – I have a crush on you. I need to go get that paper!! Your rundown and summary was awesome!
Hey, relax! They’re offering 40 year loans now…you can afford it!
That I am giving you linkage for this goes without saying, but I will do so anyway. Excellent work. 😉
Ha, too bad you’re the only one 🙂
Oh well, onward and upward…
Actually, considering how far down newspaper readership (for even something like USA Today) has gone in this country, I shouldn’t be surprised to find myself alone.
Velvet — You sound like an econ professor. Perhaps you missed your calling!
Barbara – If I went back to school, it would be for a PhD in Econ. Talking supply and demand makes my panties twist!!
Phil – 40 year loans are so scary. In what year does one finally start building equity? Oh wait, let me consult my amortization schedule. Hold please.
On a 40 year loan, at a 6.25% interest rate, payments would be about $1100 a month. In the first year, less than $100 a month goes to principal. You break equilibrium (50% of payment to interest, 50% to principal) around month 347. That’s at the end of year 28 in case anyone was doing that math.
…math?
OMG – Velvet! You should have come down to Boca with me, we had him as a speaker. I could have got you in a semi-private meeting with him. Damn. Cuz that shit would have been awesome.
I’ve had a few days to digest this and I propose, as a solution, my dear Dr. Velvet, we get out of this delinquent economy by slashing the capital gains tax, locking in the “Death Tax” relief, and allowing more rich Americans to keep their money. After all, it’s their money, it’s not the government’s money. That way, rich people will have more to invest, have more money to expand the economy, and the Trickle Down effect will solve all our problems. We’ll even win a couple of wars or something.
As a tax lawyer, I could totally kiss Elvis right now.
oh sugar pie… if i havent said it lately..i loooove you….
im glad you and sherlock are happy and im not a lesbian…(yet)… but damn.. im with you…
fuck greenspan..
and in my opinion..waaaaaaay tooo many people are JUST NOW figuring out why a subprime lender is called sub prime…
xoxo
I am so glad I didn’t buy 2 years ago when everyone else was. Actually the reason I didn’t was because I didn’t want an ARM loan and couldn’t afford anything. That said, I am going to buy something this year. With a fixed mortgage and in a range I can afford. So in other words: a studio? Haha!
Thanks for writing about this. It is fascinating to me.
I, for one, can’t WAIT for the foreclosures to begin in earnest. Hubby and I have been saying for years how awesome it’s going to be when the market totally falls apart, and everyone starts foreclosing, and THEN we’re going to swoop in with our awesome credit and start buying buying buying! WHEEE!! Yay for stupid people, because that means that people like US can benefit from their misfortune.