More Videos
- UN Fails to Agree on Response to N. Korea Launch
- Asian Markets Climb 2% on Wall Street's Gains
- Australia Jobs, Price Data Make Case For Rate Cut
- Strong Earthquake Hits Italy, Deaths Reported
- UK's Brown to Call in Banks on Imposing G20 Rules
- The Week Ahead: Rally Onward—or Roll Over?
- UBS Initiates Travel Ban in Wealth Management
- Oil Next Week: What Energy Traders Will Be Watching
- Pirates Attack Israeli Ship Off Somalia
- Sun, IBM Merger Talks Reportedly Collapse
- Mad Mail: When Do I Buy In?
- Lightning Round: CBS, Netflix, Harley-Davidson and More
- Lightning Round OT: Textron, Apollo Group and More
- Soft-Drink Smackdown
- Woe Is Wal-Mart
- Cramer: I Want to Believe
- Your First Move For Monday April 6th
- Web Extra: Fast & Furious Trades For Week Ahead
Text Size 
Former U.S. Federal Reserve Chairman Alan Greenspan said lower rates on long-term, fixed-rate mortgages and not the Federal Reserve's policies are to blame for the U.S. housing bubble.
"Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate," Greenspan wrote in the Wall Street Journal.
Calling his explanation of the causes far more credible than blaming 'easy money' policies, Greenspan wrote that "it was indeed lower interest rates that spawned the speculative euphoria.
 |
J. Scott Applewhite / AP |
However, the interest rate that mattered was not the federal-funds rate," adding that U.S. mortgage rates' linkage to short-term rates had been close for decades.
The Federal Reserve became aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004, said Greenspan, who was the Federal Reserve Chairman from 1987 to 2006.
Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have prevented the housing bubble, he said.
"The solutions for the financial-market failures revealed by the crisis are higher capital requirements and a wider prosecution of fraud—not increased micromanagement by government entities," Greenspan wrote.
Any new regulations should improve the ability of financial institutions to effectively direct a nation's savings into the most productive capital investments, he said.
"Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy," he said.
Print
Email
Data is a real-time snapshot *Data is delayed at least 15 minutes