Here Comes Greenspan's Recession

By Weisbrot, Mark | Tribune-Review/Pittsburgh Tribune-Review, January 6, 2008 | Go to article overview

Here Comes Greenspan's Recession


Weisbrot, Mark, Tribune-Review/Pittsburgh Tribune-Review


In the baseball-and-sex classic "Bull Durham," Susan Sarandon accidentally calls out the wrong name in the heat of passion and makes a remarkably quick recovery. She asks her partner which he would rather have -- her having sex with him and saying the other guy's name, or vice versa?

In the movie, it seems to work; for the moment, at least, he doesn't seem to realize that these aren't the only two possibilities.

Former Fed Chairman Alan Greenspan appears to have gotten away with a similar trick as the housing bubble that bloated up on his watch continues to deflate, dragging the economy toward recession.

Since the bubble was easily recognizable -- and recognized -- as early as 2002, he could very likely have prevented it from growing to dangerous proportions. But he has made it look as though his only choice would have been to raise interest rates and thereby risk taking down the entire economy much earlier.

In the numerous interviews he gave promoting his latest book of memoirs, the journalists neglected to ask him about a more logical option: simply explaining the bubble to the public and thereby curbing the expectations of ever-rising prices that fed the speculative frenzy.

It is also now widely recognized that the Fed abdicated its responsibility to regulate against predatory, deceptive and abusive lending in the subprime mortgage market -- although the bubble itself was still the main problem.

Greenspan himself recently put the odds of a recession at 50 percent. And that was before the latest data on house price declines (October, year-over-year) of 6.1 percent -- the biggest in more than six years. Greenspan's prognosis was also made before this past Christmas holiday shopping season came in at what looks like the worst in five years.

But he was overly optimistic even with the data at hand. It is difficult to imagine that a collapse of asset prices of the magnitude expected -- probably on the order of $8 trillion -- would not cause a recession. …

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