So What Will Be The Next Financial Bubble To Pop?

Now that it appears the real estate bubble has just about run its course, it is time to look for that next big bubble. Some financial analysts are pointing to Europe, and even the Euro currency, as the source of pending financial doom, but one analyst from Money Morning has another idea. He is pointing at student loan debt. With the costs of education rising, and wages not even remotely keeping pace, it seems to me that he has some valid points. For more on this, continue reading the following article from Money Morning.

Don't look now but there's another giant bubble out there. It's so big it rivals subprime.

I'm talking about the student loan bubble.

Recently, the outstanding volume of student loans passed $1 trillion. What's more bothersome is that the average individual amount owed by new college graduates has passed $25,000.

With college costs zooming upwards faster than inflation, this is rapidly becoming another subprime mortgage-like sinkhole.

Just like subprime, the problem is that people of modest means are being suckered by high-pressure salesmen into taking on too much debt.

The difference is that since student loans are government guaranteed and can't be released in bankruptcy, the burdens will be paid by the unfortunate ex-students and the U.S. taxpayer.

The standard justification for soaring higher education costs is a simple one.

The United States needs to maintain an educational lead in order for its wage levels to remain above those of its competitors.

I'm talking largely about emerging markets, which have been helped enormously by modern communications, making global sourcing much easier than it was.

There are two problems with this view.

First, the more esteemed colleges take great pride in not providing vocational training, and graduate large numbers of students with degrees that don't obviously qualify them for anything.

In what way is the U.S. being made more competitive by graduating students in (insert your favorite useless college major here)?

Second, even as the demand for a college education is increasing, the efficiency of providing it is declining. Both the Ivy League and state university systems increase tuition rates far more rapidly than overall inflation.

The Student Loan Bubble Drives Up Costs

In fact, there is considerable evidence that finance availability is itself pushing up college costs.

As college funding has become more readily available to the general population, it has reduced the financial pressure on colleges, since few of their students are today paying their way from part-time jobs and parent cash flow.

Huge endowments in the Ivy League, which allow those elite colleges to provide full scholarships for students, focus the competition between colleges ever more closely on league table "prestige" rather than costs.

The ranks of college administrators have also exploded since they are effectively insulated from market forces - not unlike those in medical professions.

So have their earnings - according to The New York Times, in the decade between the 1999-2000 and 2009-10 college years, the average college president's pay at the 50 wealthiest universities increased by 75%, to $876,792, while their average professorial pay increased by only 14%, to $179,970.

Meanwhile, the cost of tuition has increased by 65% while prices generally rose by 31% during the same decade.

That's precisely the opposite of what you'd want to happen, if you were concerned about college productivity and cost.

Buried in Debt by Student Loans

There are two factors pushing the escalation in student loan volume.

One is the nationalization of most student loan programs in 2009, providing government guarantees on most student loans.

That has altogether removed the risks of student loan provision from banks, as well as encouraging low-quality degree scams by for-profit colleges. For-profit colleges are a good idea, but not when combined with government-guaranteed student loans.

The other factor pushing up student loans is the Bankruptcy Act of 2005, which allowed consumers to relieve themselves of all debts in bankruptcy except student loans.

This special privilege for the student loan market has caused great hardship.

The Washington Post reported this week that Americans 60 and older still owe $36 billion on student loans, and gave one sad example of a 58-year old woman who had borrowed $21,000 to fund a graduate degree in clinical psychology in the late 1980s (which one would think was at least moderately useful), had never been able to earn more than $25,000 per annum and was now left with student loan debt of $54,000.

If government guarantees and bankruptcy exemption remain in place, the volume of student loans will continue soaring, as unscrupulous lenders provide them to naive students.

That will cause the cost of college to continue rising in real terms as college administrators pad their sinecures.

As with the subprime mortgage industry, an eventual crash is inevitable. But unlike subprime mortgage borrowers, student loan borrowers will be unable to start afresh after bankruptcy.

The solution is to eliminate the two unwarranted subsidies to the student loan industry. Student loans must no longer be guaranteed by the government.

And in bankruptcy, they must be treated like any other debt. The banks will scream, and student loans will be much more difficult to get.

For most students, that will return them to choosing a cheaper institution and working their way through college, in the traditional way - some of them might choose more marketable degree courses, too.

For the poor but brilliant, the Ivy League can continue providing full scholarships and the government can continue providing Pell grants - with their cost fully accounted for on-budget.

College costs will drop back to 1970s levels in real terms, as overstuffed bureaucracies are eliminated.

And for college administrators and student lending banks, life will get considerably harder - which is no bad thing.

All bubbles eventually burst. This one will be no different.

This article was republished with permission from Money Morning.

Solving the Foreclosure Crisis: Should We Use the Band-aid Principle?

The foreclosure crisis – the record-breaking glut of foreclosed homes that began in 2006-2007 – has rocked the nation’s economy and littered entire city blocks with vacant and/or abandoned homes due to delinquent home loans. These foreclosures act like a black hole on the surrounding property values of nearby properties, further contributing to financial hardship and blighting entire communities.

Now, four years after the crisis kicked off, we are still dealing with a foreclosure market that is far from fading.

News released recently revealed that approximately 31% of all home sales in the second quarter of 2011 were foreclosures or short sales. Year over year, that represents a 7% increase. Additionally, the average loan in foreclosure has been delinquent for a mind-numbing 599 days. Factor in the well-documented trend of lenders putting a screeching halt to their foreclosure processes due to nasty legal fights that still aren’t over and you have a troubling foundation for the housing market.

This leads some to ask the question: Do we invoke the “Band-aid Principle”?

Solving the Foreclosure Crisis Slowly Vs. Quickly

We all know the analogy. If you have a Band-aid on a wound, do you pull it off slowly, or do you rip it off quickly and limit the pain to just a second or two?

Each philosophy has its advocates for the foreclosure crisis. Proponents of the first approach – keeping as many foreclosures from entering the market as possible through loan modification programs like HAMP and loan programs like EHLP while creating tough, anti-foreclosure legislation – point to the sheer number of underwater homes on the market and say that any solution needs to slow the impact of so many foreclosures so the fragile market doesn’t collapse further.

Opponents of this approach disagree, stating that it is far more important to get it over with quickly by processing foreclosures as rapidly as reasonably possible and remove these unproductive and burdensome properties from bank ledgers – so that banks, in turn, can resume residential lending to qualified applicants. The faster foreclosures are sold, they argue, the faster home prices can stabilize.

Where to Go From Here

The argument over solving the foreclosure crisis is more complicated than just whether or not to rip the Band-aid off. Even if loan modification programs work – and many believe they don’t – you still have 4.1 million loans either in foreclosure or seriously delinquent that you have to resolve.

One solution is to aggressively push serious principal loan modifications that essentially “reset”, to an extent, the value of a mortgage loan by cutting the principal owed on the balance. That plan has its merits – some kind of loan modification has to occur – but there is nothing to suggest that banks will participate unless forced.

What needs to happen is to speed up foreclosure processing so that more foreclosures can be sold as fast as possible – a variation of the Band-aid principle. Home loans valued at pre-bubble values are unsustainable, and as long as they persist, home values will suffer and it will be more difficult for homeowners and lenders alike.

One immediate step we can take to speed up these processes and unclog the blocked foreclosure pipeline is to resolve the foreclosure settlement that is currently mired down in squabbling over legal immunity from further lawsuits against four of the nation’s largest banks. While making sure foreclosures are conducted properly with the correct paperwork is vital – legally and morally – we can’t go to the extreme and believe that foreclosures should never happen.

A healthy market depends on the ability to correct deficiencies, and foreclosure is one tool to do just that. The Band-aid principle may be in effect after all, at least when it comes to dealing with foreclosures that are waiting in line.

This was a guest post by John E. Miller:

Miller is a Real Estate Professional who has spent the last 10 years writing for several magazines and online publications. Miller is a regular contributor to Businessinsider.com as well as being the team leader of Content Acquisition and Analysis of new business development for Foreclosure Deals, where he also serves as a real estate agent expert.

Dissenting Opinions As To The Cause Of The Financial Crisis

The Financial Crisis Inquiry Commission is releasing their final report on how they believe the financial crisis came to be, however, certain members of the commission have dissenting opinions as to what the true cause of the financial crisis really was. Economics Professor Mark Thoma takes a closer look at a recent article published by the three members of the committee who had a different take on the root cause. For more on this, continue reading Mark Thoma's blog post from The Economist's View.

Bill Thomas, Keith Hennessey, and Douglas Holtz-Eakin have a dissenting statement in response to the final report of the Financial Crisis Inquiry Commission:

What Caused the Financial Crisis, by Bill Thomas, Keith Hennessey, and Douglas Holtz-Eakin, Commentary, WSJ: Today, six members of the Financial Crisis Inquiry Commission ... are releasing their final report. Although the three of us served on the commission, we were unable to support the majority's conclusions and have issued a dissenting statement. ...

We recognize that ... other ... narratives have popular appeal:... Had the government not supported housing subsidies (the first narrative) or had policy makers implemented more restrictive financial regulations (the second) there would have been no calamity.

Both of these views are incomplete and misleading. ... We believe the crisis was the product of 10 factors. Only when taken together can they offer a sufficient explanation of what happened:

Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers' ability to pay.

However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles—the dot-com bubble of the 1990s, for example—that were not nearly as devastating... Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed? Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets.

These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to a cascade of firm failures. ... We call this the risk of contagion (factor 7). In other cases, the problem was a common shock (factor 8). A number of firms had made similar bad bets on housing...

A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as the health of almost every large and midsize financial institution in the U.S. and Europe was questioned. The financial shock and panic caused a severe contraction in the real economy (factor 10). ...

[I]t is dangerous to conclude that the crisis would have been avoided if only we had regulated everything a lot more, had fewer housing subsidies, and had more responsible bankers. Simple narratives like these ignore the global nature of this crisis, and promote a simplistic explanation of a complex problem. Though tempting politically, they will ultimately lead to mistaken policies.

I don't think the conclusion that better regulation would not have stopped the crisis follows from the factors they list.

By their own admission, the reason that factors 1 and 2 led to factor 3 was "an ineffectively regulated primary mortgage market." So right away better regulation could have stopped the chain of events the led to the crisis.

Factor 3 was "nontraditional mortgages that were in some cases deceptive, in many cases confusing, and often beyond borrowers' ability to pay." Sure seems like regulation might help to prevent deception and confusion (through, among other things, a financial protection agency). One thing is clear in any case. The market didn't prevent these things on its own.

On to factor 4: Securitizers lowering credit standards, a failure of credit agencies, and buyers failing to do their own due diligence. Once again, regulation can help where the private market failed. The ratings agencies exist because they help to solve an asymmetric information problem. The typical purchaser of financial assets does not have the resources needed to assess the risk of complex financial assets (which is why saying that they should have performed their own due diligence misses the mark). Instead, they rely upon ratings agencies to do the assessment for them. Unfortunately, the ratings agencies didn't do their jobs -- perhaps due to bad incentives arising from to how they were paid -- and this is where regulation has a role to play.

Factor 5 is the accumulation of correlated risk -- again something a regulator can stop once the accumulation or risk is evident. This seems like an easy one -- when regulators see this type of risk building up, they should do something about it. The question, however, is how to give regulators better tools for assessing these risks. Backing off on regulation, as implied above, won't help with this.

Factor 6 is "holding too little capital relative to the risks and funded these exposures with short-term debt." Too little capital? Mandating higher capital requirements is the solution to this problem. Basel II is one example, but it doesn't go far enough. (The other part of factor 6 is essentially too much exposure to risk which is covered in the previous paragraph.)

Factors 7 and 8 are risk contagion and widespread exposure to a common shock. The private sector didn't prevent these risks from getting too high so, again, why wouldn't we want a regulator to do something about excessive risks of this type? False positives is one worry -- reacting to problems that aren't there -- but that is a matter of how high to set the threshold for action, not an argument against regulation itself. If anything, the threshold for action was too low prior to the crisis.

Factor 9 is "A rapid succession of 10 firm failures, mergers and restructurings in September 2008 that endangered the financial system." Too big to fail? Guess who can fix that?

Finally, factor 10 is the effects on the real economy. I'll concede that regulation could not have helped much here. Once the financial system crashed in the way that it did, the real economy was sure to follow. But remember, these factors are, for the most part, a chain of events. If the chain had been broken by more effective regulation anywhere along the way, the chain of events is interrupted and factor 10 does not come into play.

For almost every factor mentioned above, regulation could have reduced or completely eliminated the risk. Thus, it's hard to see how a conclusion that " it is dangerous to conclude that the crisis would have been avoided if only we had regulated everything a lot more" can possibly follow.

This post was republished with permission from The Economist's View.

One Investors Strategy For The New Year

Are you trying to figure out what to invest in this year? Well Toni Straka from Prudent Investor, knows what his investment portfolio will be made up of in 2011. Read the following post to learn more about Straka's strategies and predictions for the new year.

BONDS: The 20-year interest rate downtrend reversed in 4Q10: Short all government bonds (and hope your counter party will remain solvent.)

Rising rates will become the tightening noose for all debtors. Mortgage holders may find comfort by switching to fixed rate contracts as far out as possible.

SHARES: As inflation heats up, go long energy, food stocks (and convert ensuing profits into gold.) Underweight consumer (durables) products in a cool economic environment, short debt-laden financials, especially the "dumb money" insurance sector.

DERIVATIVES: Stay away from all OTC instruments as your contract will ultimately only be worth as much as your counter party can pay. Square all derivatives in disguise like ETFs.

COMMODITIES: Buy silver as it is still 70% away from its nominal high seen in 1980 and has a dual use as money and industrial resource. Take profits once gold:silver ratio has descended to 1:30 and reenter after technical consolidation. All other commodities have reversed and have overshot the mean by now.

CURRENCIES: Buy the real stuff - gold. All other fiat currencies are just a claim on some central bank counter party and historically they have all wrecked their product via inflation in the last 300 years.

Once you have done this handful of trades, turn off the charts, lean back, contemplate the world and check back here in January 2012.

This post was republished with permission from The Prudent Investor.

How To Stop The Next Financial Crisis

Are financial crises unpredictable or can we put simple financial indicators in place that will warn us before it is too late? An early detection system for financial danger that accurately pinpoints the type of danger we are facing could help prevent the next crisis. See the following post by Mark Thoma for more on this topic.

David Levine "aggressively argues":

our models don't just fail to predict the timing of financial crises - they say that we cannot.

The San Francisco Fed's Bharat Trehan says:

simple indicators based on asset market developments can provide early warnings about potentially dangerous financial imbalances. ... [W]e have taken two simple indicators off the shelf and shown that both would have signaled impending trouble prior to the current crisis. That makes it harder to argue that financial crises are, by their nature, unpredictable. And it shows that such simple indicators can be useful ... as signals of rising levels of risk in the economy.

See here. Or here.

We ought to be able to say, at the very least, something like:

If you keep eating that junky credit instead of a healthier financial diet, your monetary circulatory system is likely to have severe problems at some point in the future.

Many people had a sense things were out of balance and that at some point it would cause us problems, but the indicators most people looked at pointed to a diagnosis involving exchange rate movements and an international unwinding. The discussion centered on issues such as whether we would have a hard or a soft landing as this process unfolded, there was little discussion of the type of crisis that actually occurred.

So we need two things. First, we need indicators such as those identified in the SF Fed article that can tell us when danger is building in the financial sector.

But that is not enough. Though many people had a sense from the indicators they looked at that things were out of balance, the indicators pointed to international financial issues rather than the true problem, and hence most of the analysis and policy discussions were devoted to guarding against problems related to international financial flows.

Thus, the second thing we have a need for is a set of indicators that do a better job of telling us where the problems are likely to occur. That is where we made the biggest mistake, misdiagnosing the type of crisis that was coming. Having indicators that can do a better job of identifying the type of financial crisis we are facing will allow us to design and implement effective policy responses rather than wasting time analyzing and planning for the wrong type of crisis.

This post has been republished from Mark Thoma's blog, Economist's View.

Have We Learned Nothing From The Financial Crash?

A year after the Lehman fiasco, it seems as if Wall Street has learned nothing from the financial implosion. Banks are still growing larger and risk taking behavior has returned. Stanley Bing from The Street explains why we should not be surprised.

The news is full of pundits, analysts and even a president opining on the state of the finance business one year after the big plotz. Consensus is that we've all learned nothing. The big banks are getting bigger. Risky instruments are reappearing. The Street is once again getting on its high horse about over-regulation. Thinking people, quite naturally, are worried. We're not even out of the woods yet and here come the same old players starting to sing the same crazy tune.

The critics just don't get it. Wall Street isn't a rational, thinking creature. Oh sure, it's got charts and graphs and metrics and fetrics. But if you want to know the way things really operate, you have to look at a creature that isn't driven by its brain, but by its heart... and by any other organ that responds to that beat.

In short, Wall Street has all the sentience, maturity and emotional self-control of a teenager... or maybe of a 50-year-old guy with a tiny ponytail and a red BMW Z4.

Last year, before the breakup, he was so excited. Love was in the air, and with it lots of money. Love involves risk, of course. But that's at the core of what's so exciting! No risk? No passion. Particularly for an entity whose emotions are quite immature, who needs daily stimulation to remain engaged, who requires the tang of danger to feel fully alive. Those were great days! Ah, to be rich and in love!

Then... the unthinkable happened. The big breakup. Poor Street's heart was broken and what was worse, his belief that the risk was worth taking ever again was smashed to pieces. Poor guy. He languished for months, afraid to grant credit, terrified of incurring debt, sleeping much of the day away, waiting for nighttime when it was permissible to drown his sorrows.

And yet, the heart of the crazy, irrational Street is strong. He can't live without that rush of endorphins that comes with the high-wire act! So now he's coming back, ready to love again, to make the plunge, to take those risks, even the stupid ones he knows will lead to his destruction again.

It this wise? Is this the behavior of a thoughtful, mature person? Certainly not. He's a mad, impetuous fool! He can't live without the thrill of the chase, the agony of anticipation, the ache, the yearning, the oasis of glory and satisfaction in the desert of life! He won't! Step aside, world! Love is in the air! He's apt to do just about anything!

Can't anybody keep an eye on him, for his own good?

This post has been republished from The Street.

Overleveraged Economy Not To Blame For Financial Crisis

According to MIT economics professor Ricardo Caballero, leverage is not the real problem that led to the financial collapse, but rather excessive concentration of risk. If he is right, could policy makers be chasing the wrong culprit as they create new regulation for the financial system? The following post from Economist's View, discusses this alternative view.

Ricardo Caballero hasn't given up on his argument that it was the excessive concentration or risk, not leverage, that caused problems in financial markets (and it's an argument I'm sympathetic to):

Economic Witch Hunting, by Ricardo Caballero, Commentary, Economists Forum: Perhaps one of the economic phenomena most akin to witch-hunting is the diagnostic and policy response that develops during the recovery phase of a financial crisis. Understandably, pressured politicians and policymakers rush to find culprits... All too often they find a ready supply of these in preconceptions and superficial analyses of correlations. This time around the scapegoats are global imbalances and leverage.

Global imbalances are the victim of preconceptions: Many economists and commentators argued before the crisis that large global imbalances would lead to the demise of the U.S. economy... The crisis indeed came, but rather than destabilizing the US economy, capital flows helped to stabilise it, as flight-to-quality capital sought rather than ran away from US assets. ...

The fact that the actual mechanism behind the crisis had nothing to do with that which was used to explain the forecast of doom has long being forgotten, false idols have been erected,... global imbalances have been indicted for witchcraft, and ever more exotic rebalancing and currency proposals make it to the front pages of newspapers around the world.

Leverage is the victim of superficial analyses of correlations: In my view one of the main factors behind the severity of the financial crisis was the excessive concentration of aggregate risk in highly-leveraged financial institutions. Note that the emphasis is on the concentration of aggregate risk rather than on the much-hyped leverage. The problem in the current crisis was not leverage per se, but the fact that banks had held on to AAA tranches of structured asset-backed securities which were more exposed to aggregate surprise shocks than their rating would, when misinterpreted, suggest.

Thus, when systemic confusion emerged, these complex financial instruments quickly soured, compromised the balance sheet of their leveraged holders, and triggered asset fire sales which ravaged balance sheets across financial institutions. The result was a vicious feedback loop between assets exposed to aggregate conditions and leveraged balance sheets.

The distinction emphasized in the previous paragraph may seem subtle, but it turns out to have a first order implication for economic policy... The optimal policy response to this problem is not to increase capital requirements (or to deleverage), as the current fashion has it, but to remove the aggregate risk from systemically important leveraged financial institutions’ balance sheets. This should be done through prepaid and often mandatory macro-insurance type arrangements, which can accommodate valid too-big or too-complex to fail concerns, but without crippling the financial industry with the burden of brute-force capital requirements. ...

We shouldn't assume that the next potential financial crisis will be identical to this one in terms of how it comes about or how it expresses itself, so we need to ensure that the system can withstand different types of financial shocks. Given that these shocks can come from unexpected places, it's not clear to me that insurance discussed above will stop all of the ways in which financial market problems can lead to harmful deleveraging. Hence, we may want to put the type of insurance plan Ricardo Caballero would like to see instituted in place, and then buttress that protection with enhanced capital requirements to safeguard against unexpected causes of harmful deleveraging.

This post has been republished from Mark Thoma's blog, Economist's View.

Is Alan Greenspan The Main Villain Behind The US Housing Bubble?

Peter D. Schiff argues that Alan Greenspan will go down in history as the main villain in creating the financial house of cards that resulted in the historic crash. Greenspan, who was rarely challenged during his reign as Fed Chairman, may have inadvertently created conditions that resulted in the economic crash of 2008. For more on this, read the following article from Schiff as published on Money Morning.

Back during the U.S. invasion of Iraq, when the U.S. government issued its now-famous deck of playing cards featuring pictures of the 52 arch villains of the Iraqi police state, Saddam Hussein’s face adorned the Ace of Spades. If the Barack Obama administration wanted to engage in a similar public relations campaign - this time with a focus on the U.S. real estate crisis - that top card should be reserved for former Federal Reserve Chairman Alan Greenspan.

In a speech before the National Association of Realtors last Tuesday, Sir Alan “the-bubble-blower” Greenspan claimed that his low-interest-rate policies in the early and middle years of this decade had no effect on mortgage rates or real estate prices. As a result, he claims no responsibility for the subprime mortgage crisis. But even current Treasury Secretary Timothy F. Geithner - who shared interest-rate-policy responsibility as governor of the New York Fed during the Greenspan regime - recently admitted that overly accommodative policy helped inflate the bubble. So what does Greenspan know that everyone else doesn’t?

Greenspan’s primary defense is that mortgage rates were a function of long-term interest rates that were simply not responding to the movement in short-term rates, which he did control. While it is true that the flow of capital from foreign creditors with excess dollars did keep long rates low despite rising short rates, this “conundrum” was not the leading factor in the housing bubble. Although rates on 30-year-fixed-rate mortgages are based on long-term bonds, by 2005 such loans had become an endangered species. The housing bubble was all about adjustable-rate mortgages (ARMs) with teaser rates of one to seven years - which are primarily based on the benchmark Fed Funds.

The rock-bottom teaser rates, permitted by the 1.0% Fed Funds rate, were the primary reason that many homebuyers were able to qualify for mortgages they couldn’t otherwise afford - which, in turn, enabled them to bid U.S. home prices up to “bubble” levels. By pushing down the cost of short-term money, the U.S. central bank enabled homebuyers to make big bets on rising real estate prices. Without the Fed’s help, few borrowers would have “qualified” for these risky mortgages and real estate prices never would have been bid up so high.

Greenspan expresses exasperation now, as he did then, that his careful nudging of interest rates higher by quarter-point increments did not translate into corresponding increases in long-term rates. Unfortunately, according to Greenspan, the markets would not cooperate with his wise guidance, and to his dismay, mortgage rates fell despite his best efforts.

As they say in Texas, that dog just won’t hunt. If the “measured pace” of his quarter-point rate hikes were too slow to produce the desired effect, why didn’t Greenspan jack up the pressure? With interest rates far below the official inflation rate for so many years during the bubble, he certainly had plenty of room to maneuver. The claim that he was unhappy with the ultimate results of his rate hikes - despite his having done nothing to adjust that policy - is ridiculous.

In addition to his colossal errors on interest-rate policy, there were many other ways Greenspan blew air into the real estate bubble. One example was what the market called the “Greenspan put.” By creating the perception in word and deed (that has since proven accurate) that the Fed would backstop any major market or economic declines, lenders became more comfortable making risky loans.

In an often-quoted 2004 speech, Greenspan went so far as to actively encourage the use of adjustable-rate mortgages and praised home-equity extractions for their role in contributing to economic growth. In fact, rather than criticizing homeowners for treating their houses like ATM machines, he often praised the innovative ways in which such homeowners were “managing” their personal balance sheets.

In short, Greenspan was as much a proponent of leverage for homeowners on Main Street as he was for bankers on Wall Street.

The bottom line is that Greenspan fathered the housing bubble and now he refuses to acknowledge kinship with his wayward child. His denial of responsibility is an act of stunning bravado, and is a testament to his ability to turn even the simplest of situations into an impenetrable tangle of theories and statistics.

“The Maestro” easily trumps the private sector jokers who now hold top dishonors in our pack of economic villains. The fact that Greenspan still has any credibility shows just how little understanding the general public - including Wall Street and the media - actually has about this crisis.

This article has been reposted from Money Morning. You can view the article on Money Morning's investment news website here.