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Global Crisis

Irish Crisis:  Is Alan Greenspan to Blame?

By Shlomo Maital





Alan Greenspan


Ireland is in the throes of a major crisis.  Losses of the nationalized Anglo Irish Bank mount daily and threaten a meltdown of Ireland’s whole economy.  As the Irish Government acts to bail out the bank, the amount of money this entails (some $50 b. and counting) will lead to an unbelievable, staggering Irish government deficit of about one-third of Ireland’s GDP.  True, this will be a one-shot one-off deal.  But it is still incredibly huge.  The cause?  Irresponsibly bad housing loans.  Ireland’s property bubble is worse by far than America’s.    

    Ireland’s finance minister Brian Lenihan said the other day,  “Any Anglo failure would bring down the sovereign. It is systemically important not because of any intrinsic merit in the bank.  But because of its size relative to the national balance sheet.   No country could contemplate the failure of such an institution.”   

    Who is to blame?  There is more than enough blame to share among many people.   Here are some data about the magnitude of the bubble:

Since 2000, approximately 75,000 housing units have been built every year as detailed by the Irish Department of Environment, Heritage and Local Government. However, a significant proportion of these new homes are unoccupied. Economic commentators give a figure of approximately 230,000 vacant properties. Of these up to 115,000 or so may be holiday homes. 

    Blame Ireland’s Central Bank, which saw the bubble explicitly in 2006 and took no action, and even hid its concern.  Blame Ireland’s planners, which actively encouraged massive overbuilding. Blame Ireland’s government, which insisted banks recognize financial losses up front instead of deferring them (as many US banks did). 

   But above all, blame Alan Greenspan, head of the US Fed for 19 years, from 1987 through 2006. 

   It was Greenspan who showed other nations like Ireland how to create a housing bubble, by slashing interest rates rapidly and irresponsibly from 6.5 per cent (Fed rate) to 1 per cent, in the wake of the 2000 dot com crisis.   No Central Bank should ever slash interest rates so far or so fast, to the point where ‘real’ (inflation-adjusted) rates are actually negative (“Here, borrow a ton of money! Please! We’ll pay YOU if you do”).   Then, when Greenspan woke up to what he had done, in 2005, he rapidly INCREASED interest rates, causing the bubble to burst with collateral damage greater than necessary had a wiser and gentler hand controlled the monetary spigot. 

    In a self-serving article published in Spring, [1] Greenspan argues:   1.  It was the fall of WORLD interest rates, not US interest rates, that created the property bubble.   It is easy to show that the fall of world interest rates was driven by enormous credit creation in the largest capital market, America. 2.  The excess leverage, or debt, incurred by banks was driven by failure to understand complex risk-creating financial instruments.  This led to a domino effect, with one bankruptcy or near-bankruptcy causing another.  It is the responsibility of the Fed to blow the whistle when it sees excessive leverage and debt.  It is the responsibility of the Fed to understand complex financial instruments that banks do not understand.  Under Greenspan, it failed. 3.  The property bubble collapse was inevitable, given the low capital requirements of banks (the amount of capital they held relative to their liabilities).  It is the responsibility of the Fed, charged with monetary stability, to raise the alarm if it sees capital requirements are too low, and above all, not to abruptly and disastrously raise rates if it understands that this will cause the excess leverage and debt to generate financial crisis.  The Fed, under Greenspan, failed.

      And Ireland?    Governments all over the world emulated and imitated America’s aggressive policy of stimulating housing and construction.   Some governments, like that of Ireland, outdid even Greenspan.  

     Mr. Lenihan?  Send the $50 b. bailout bill, which your suffering Irish taxpayers will have to pay (an enormous sum for a country with only about 4.5 million people, amounting to $10,000 per capita, man woman and child, just this one single bailout)  to Alan Greenspan.   Of course, he won’t pay it.  But perhaps he will stop inflicting his self-serving ‘analyses’ about how he is guilt-free,  on the world.

   To be fair, let me stress:  Greenspan saved the world in 1998.  When LTCM ran up debts of close to $1 trillion, Greenspan led a rescue effort even though he had no jurisdiction (LTCM was registered in the Cayman Islands), realizing the collapse of LTCM would lead to global financial meltdown.   Is there any example in history of someone who has in a relatively short space of time saved the world, and then nearly destroyed it?  I doubt it.    

   The Talmud quotes a Rabbi, Shimon ben Shatach (Ethics of Our Fathers)  who said, I have lived my life among the wise and found nothing better than silence.    Greenspan lived among the wise.  But alas, in 2000-2006, he was not one of them.  He should therefore in future, forever, remain silent.   

[1] The Crisis”, by Alan GreenspanBrookings Papers on Economic Activity, Spring 2010, pp. 201-246.


Blog entries written by Prof. Shlomo Maital

Shlomo Maital
October 2010
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