Greenspan wrote a letter to the Wall Street Journal. It’s a long for what it is (propaganda) and is written in an evasive technical style. Moreover, the whole thing is one big narrative fallacy. In it he claims that “between 1971 and 2002, the fed-funds rate [the interest rate at which banks lend money to one another] and the mortgage rate moved in lockstep.” But, because in 2004 the mortgage rates “failed to respond as expected to the Fed tightening in mid-2004,” and because they did not correlate much between 2002 and 2005, Greenspan concludes that the mortgage rate had become magically “decoupled” from the fed-funds rate. Oh, excellent!
It’s a shame this is taken as actual expert analysis while the reality is that it’s no more meaningful or realistic than reading tea leaves.
Nassim Taleb wrote a book about how useless it is to narrate about cause and effect in markets, because markets are “chaotic”– it’s mathematically impossible to predict how a certain event or force in the market has affected or will affect the whole. There are too many complex variables, too much unknown. But sketchy explanations for this infinitely complex data is all Greenspan’s letter is concerned with: Taylor can’t explain this so he’s wrong, we accept this explanation. It’s all just speculating. And even if two variables like the fed funds rate and the 30-year fixed mortgage rate seem correspond for a while, that doesn’t necessarily mean they always will. Alot of the time Greenspan and the other experts of hot air let their desired answers drive the questions.
Greenspan’s whole letter is, at best, a well-educated guess. When he talks about the different rates and whether they’re “marching in lockstep” or “decoupled,” he’s not talking about anything more real than the Tooth Fairy or Tinkerbell. It’s pure fantasy. But it’s presented as truth, and he’s respected in the financial community despite being significantly responsible for the mortgage market disaster.
I accept this model: a market, like any natural system, responds to disruptions by adapting itself to them. Arbitrary interference with the market (like a Federal Reserve Bank’s injection of funds for the sake of reducing loan rates) cause such disruptions. The Fed has been persistently disrupting the market for this whole decade. I am not at all surprised that after a decade of adjustments and tinkering with the market– in which the economy appeared to grow by ridiculous leaps– we are experiencing a market correction. It seems like a perfectly natural result, and one the Fed shouldn’t make any worse than it already has.
Greenspan and anyone else connected with the Federal Reserve Bank should be doubted, they have considerable incentive to lie.