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Criticizing Greenspan's Rate Hikes
We all know the thesis that the subprime crisis is Alan Greenspan's fault for cutting interest rates way too much and fuelling an unsustainable mortgage-credit bubble. But now Michael Mandel comes along with the flipside argument: that the subprime crisis is Alan Greenspan's fault for raising interest rates way too much and thereby concentrating pain on the holders of adjustable-rate mortgages.
Here's a thought...maybe part of the reason the credit markets are in such bad shape because the Fed raised rates too fast and too high...
Who was affected by the increase in the Fed funds rate? Well, not corporations: They saw their rates fall over this period. Conventional mortgages edged up by half a percentage point. Credit card interest rates rose by about a percentage point.
The big losers were precisely one group: Holders of adjustable rate mortgages who could not refinance into fixed rate mortgages. Did I hear someone say 'subprime'?
Basically the Fed took a sledgehammer to the subprime sector in order to slow the economy...they should not be surprised that it broke.
This is a weird argument. Subprime adjustable-rate mortgages only became popular in the first place because of the irrationally low level of short-term interest rates. The Fed didn't really sledgehammer the subprime sector, so much as raise interest rates back to where they ought to be. The unfortunate consequence of that action was to drive a stake through the heart of subprime adjustable-rate mortgages. But once you've erred by cutting rates too much, you can't make up for that mistake by keeping rates low in perpetuity.
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