Arnold Kling  

Subprime Daily Briefing, Dec. 12

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My Defense of Experts Against ... Orszag gives my talk...

Greenspan, Leonhardt, plus

David Leonhardt writes,


No matter how big a mortgage rescue plan the federal government puts together, no matter how much further the Federal Reserve cuts interest rates, the worst housing slump on record is going to continue into 2008 and probably beyond. The slump can’t end until home prices come back in line with economic reality.

...Instead of selling at reduced prices, sellers are holding out, hoping that the good times will somehow return.


Alan Greenspan writes,

Over the past five years, risk had become increasingly underpriced as market euphoria, fostered by an unprecedented global growth rate, gained cumulative traction.

...There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century.


I wrote in the risk disclosure problem that the risk premium seems to have a cyclical life of its own.

Greenspan continues,


Simple correlations between short- and long-term interest rates in the U.S. remain significant, but have been declining for over a half-century. Asset prices more generally are gradually being decoupled from short-term interest rates.

Arbitragable assets--equities, bonds and real estate, and the financial assets engendered by their intermediation--now swamp the resources of central banks.


This is what I said in Can Greenspan Steer?. More recently, I argued this point when I asked, Am I a heterodox Keynesian?.

On the Freddie Mac front, The Washington Post reports,


[Freddie Mac CEO Richard] Syron traced the trouble in the mortgage business to a housing bubble and accepted some responsibility. Fannie Mae and Freddie Mac contributed to the problem by spreading the message that everybody should own a house, he said. In fact, many people who should not have owned houses bought them, he said. Next year, the nation will have to come to terms with the big political challenge of converting much of that real estate into rental housing, Syron said.

...In the future, Freddie Mac can save money "through attrition and managing our workforce better," Chief Financial Officer Anthony S. "Buddy" Piszel said.


I would suggest starting at the top. My former colleagues at Freddie Mac reported that back when Syron took over that he and his cronies showed immediate contempt for Freddie Mac's corporate culture. Syron's first speech to the employees was jaw-droppingly insulting, and none of them has forgotten it.

All it would have taken for Freddie Mac to avoid its problems would have been for the top executives to recognize that they needed to learn about the mortgage business from the people working for them.


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